Global Intel Hub
We previously covered the recently burst mega-Ponzi scheme fraud, Ezubao, the biggest in Chinese history which conned more than 900,000 investors out of $7.6 billion in less than two years under the guise of being a P2P lending platform, in this is wha...
Posted: February 4, 2016, 1:33 am
Oil’s continued plunge is vying with China for the early financial headlines in 2016.
Yet many U.S. investors are missing the most important aspect of oil’s collapse: the dramatic effect oil’s falling prices are having on Saudi Arabia.
In November 2015, I speculated that the Saudis may have to devalue their currency, the riyal, versus the U.S. dollar for the first time since 1986.
Today my prediction looks prescient, as this supposed long-shot, black swan event is now becoming a distinct possibility.
Saudi Arabia’s Gigantic Budget Problem
The low price of oil – caused in part by the Saudis’ market share war – has blown a hole in the country’s budget.
Saudi Arabia announced at the end of 2015 that it ran a record budget deficit of $98 billion. That’s 15% of the country’s gross domestic product. To stem the bleeding, the Saudi government slashed its 2016 budget by 14%, and increased domestic fuel prices by two-thirds, even though it’s still only around $0.20 per gallon.
Meanwhile, the Saudis have also taken other measures to right the ship.
A few months ago, their sovereign wealth fund began repatriating funds from overseas money managers. This served to drain liquidity from global financial markets and hurt stocks. The Kingdom also sold sovereign bonds for the first time since 2007, and plans to sell at least $32 billion in sovereign bonds in 2016.
Finally, the Saudi Arabia announced that parts of its crown jewel – Saudi Aramco – will be sold in an IPO. Of all the recent moves made by the Kingdom, this is surely the most telling.
Saudi Aramco dwarfs any other oil company and will fetch a pretty penny. But it would’ve gotten a lot more if the sale had occurred when oil prices were high. That’s why I think the juiciest parts will not be part of this IPO.
Thinking the Unthinkable?
Even selling part of Saudi Aramco is unlikely to get the country out of the hole it has dug itself into with the oil share war. Bank of America estimates that $30-per-barrel oil will balloon the Saudi budget deficit to nearly $180 billion this year.
Thus, the smart money is betting that the Saudis will break the riyal-dollar peg, which has been set at 3.75 riyal to the dollar since 1986. The 12-month forward contracts on the riyal-dollar rate are trading at a 17-year high.
The Saudis have begun blowing through their massive reserves in trying to defend the peg. Sounds a lot like the Chinese problem, doesn’t it?
Reserves have declined from a peak of $746 billion in August 2014 to $635.2 billion at the end of November 2015.
Even the former head of asset management at the Saudi central bank, Khalid Alsweilem, thinks the peg will be history. He told the U.K.’sTelegraph, “If the reserves keep going down as they are now, they will not be able to keep the peg.”
If the Saudis opt to not devalue the riyal, they’ll have to cut oil production to get the price back up. I believe they’re too far down the path of trying to eliminate their competition to suddenly reverse course, and end up saving the U.S. shale producers from bankruptcy.
Any devaluation would have global implications and upset stock markets again.
Alsweilem said, “The consequences will be dramatic.” After all, the dollar peg has been the anchor of Saudi economic policy and global credibility for the past three decades. A change would surely stir up turmoil within the royal family, and give a boost to those opposed to the regime (such as the Iranians).
Let’s just hope the Saudis can control any devaluation and this doesn’t spiral out of control.
Posted: January 27, 2016, 1:07 am
Alongside the centuries-old banks in the UK is a new crop of digital-only banking startups poised to enter the market. Licensed from the Bank of England last year were Tandem Bank and Atom Bank, with Mondo Bank and Starling Bank aiming to become fully regulated this year.
Among these digital startups, the common denominator is that they have been built from the ground up, and are banking solutions catering to the online and mobile based world. As such, in place of bank branches are multi-feature mobile apps that provide banking solutions as well as other tools focused on personal finance. However, traditional banks have also shown that they are evolving with the times with many firms having created digital brands of their own.
With the race for digital banking supremacy on, startups are battling their larger banking brethren to both acquire a new generation of customers as well as grab market share from existing account holders seeking innovative approaches to banking. Gaining a larger cash chest for this battle is Starling which has announced that it has raised $70 million from investment manager Harald McPike.
Founded by CEO Anne Boden, previously the Chief Operating Officer of AlB, Starling will be using the funds to help it enter the UK market and solidify its team as it finalizes its offering and awaits regulatory approval. In addition to the new funds, Starling announced its Board of Director appointments. The board will be chaired by former Standard Bank non-executive director Oliver Stocken, and include Victoria Raffé formerly of the FCA, as well as Marcus Traill and Craig Mawdsley as non-executive directors. The four join Mark Winlow and Steve Colsell who were appointed in 2015.
For McPike, the investment in Starling Bank is his latest in the financial field. Operating the QuantRes group of companies, McPike’s endeavors include algorithmic trading and quantitative investments. A previous investment for McPike was US-regulated online forex broker ILQ for which he also served as a company principal. Operating under the NFA’s jurisdiction, McPike was noted for providing material financing to help ILQ meet minimum capital requirements for operating a forex broker which are higher in the US than anywhere else in the world.
Regarding the investment, Anne Boden stated: “It was important to us to have an investor with not just the financial strength but who also shared our ambition of empowering people with meaningful insight into their own financial information. With his background in algorithmic trading, risk management and technology, Harald sees the significant potential of technology in the retail banking sector. His commitment of $70m is the catalyst needed to propel Starling’s launch.”
Harald McPike, Founder of QuantRes, added: “Starling Bank will provide people with the kind of innovative leaps in their financial lives that they have experienced in transportation and video streaming, so this is an investment opportunity I could not pass up. I share Starling’s vision of creating genuine positive change in peoples’ lives and will enjoy seeing a revolution in the banking experience. Mobile technologies continue to alter fundamentally our lives and expectations of how we manage them, but it seems that traditional banks are not able to adapt fast enough. Anne and her team bring strong capabilities, passion and determination to finally provide people a modern, mobile-first bank.”
Posted: January 25, 2016, 12:10 am
We’re starting to get a little morbid around here – first with the “Is Trend Following Dead?” piece a couple weeks back, and now an “autopsy” of sorts on what went wrong at John W. Henry’s self-named firm. Some of the sales teams in the industry may prefer to avoid discussing such subjects, probably thinking something along the lines that doing so will “scare away the customers,” but to hear that John W. Henry was shutting down his eponymous managed futures shop was the kind of news that draws us like a moth to a flame.
Here was an industry stalwart in every sense of the word. A man who helped put managed futures on the map, and helped his pocket book to the tune of becoming a billionaire. He is a literal Hall of Famer, having received the Futures Hall of Fame award (whatever that is) from the Futures Industry Association. This isn’t quite Paul Simon hanging up his guitar, or Steven Spielberg deciding to get out of the movie business – but it’s close in terms of shock factor in the managed futures space.
This raises one huge question - well, actually, it raises hundreds of questions - but the big one is this: what in the world happened? We don’t just mean this week in the announcement that he was done, either. What happened in the past 8 years to transform a behemoth into a blip on the radar? Where did John Henry go wrong? Eight years ago he was managing $3 Billion and on top of the managed futures world, with a hot young upstart called Winton measuring in at only about 1/3 the size of Henry’s managed futures empire.
Why was 2004 the top for Henry, yet just a launching point for Winton and other billion-dollar managers? But most importantly for investors - how can we learn to identify when a top-tier managers’ best days are behind them?
Did he take his eye off the ball?
Excuse the all too easy baseball pun here – but the easy answer for many is to say things started to go downhill when Henry started to stray from his managed futures roots and dabble in sports, buying the Florida Marlins, then Boston Red Sox, a Nascar team and an English soccer squad. If he had only spent less time analyzing pitchers and trying to hire the next Billy Beane – and instead spent more time researching new models and risk parameters for his CTA – then things might have been different… or so the logic goes.
This would be exactly the kind of shift that an ongoing due diligence program is designed to catch, and something we wrote about not long ago in a newsletter. The general idea is that by staying in close contact with a manager, you can get a feel for when things might be going awry in a way that might impact performance. There is never a guarantee that you'll see the curve ball coming, but you've always got a better chance of it if your eyes are open.
The problem is that this logic starts to fall apart when we look at just when Henry started these other business ventures, which, according to the Disclosure Document for the JWH programs, began as early as 1987:
“Since the beginning of 1987, [Henry] has devoted, and will continue to devote, a substantial amount of time to business other than JWH and its affiliates.”
Even if we use the later date of 1998, according to a great 2007 blog post (they had blogs back then?) from the now-deceased Greg Newton (as if this story wasn’t morbid enough already), the shift of focus to include a sports empire doesn’t appear to have affected the performance (which held up until the end of 2004).
His heavy-duty distractions did not begin until he became involved in major league baseball… Henry bought the Florida Marlins in 1998.
Maybe it’s the Boston Red Sox curse, which Henry supposedly lifted by bringing a World Series title to Beantown? He became involved there in 2002, and things have been bad on the managed futures side for most of the time since.
So while the brains of the operation shifting his focus to baseball seems like an easy due diligence red flag, the numbers don’t really support it as the cause of the decline. Regardless, any investor after the year 2000 would have known of this concern.
A more nuanced “taking his eye off of the ball” argument – and something to consider when conducting due diligence on a manager – is the number of programs in the stable. For JWH, the answer is: quite a few. There are 17 different “capsule performance” tables in the JWH D-Doc. This can be another worry in the due diligence process – can a manager run 17 world-class programs at once? And if not, which would you rather see: 17 mediocre programs, or 1 excellent one?
It’s a plausible story, but in this case, perhaps a more likely culprit in terms of “who’s minding the store” is the high manager turnover.
So if the boss isn’t always running things, you had better have a very high level of confidence in whoever is picking up the slack. Leadership transitions are often due diligence red flags, but as it turns out – this one isn’t all that straightforward, either.
We’ll borrow heavily from Greg Newton in parsing the Disclosure Document and news clippings on Henry company hires here:
Like those stomach-churning drawdowns, management turnover is nothing new at JWH. Before Rzepczynski’s record tenure ended in January [Others shown the door at much the same time as Rzepczynski included long-time marketing executive Ted Parkhill; Bill Dinon, head of sales; and Andrew Willard, director of technology], past holders of the president title included Verne Sedlacek, now president and chief executive officer of Commonfund; Bruce Nemirow, now a principal of Capital Growth Partners, a third-party marketing company; and Ken Tropin, who, after a distinctly less than amicable split with Henry, went on to found Graham Capital Mgt Inc in 1994. That firm’s assets passed JWH’s several years ago.
Between Nemirow and Sedlacek, Peter Karpen, a former chairman of the Futures Industry Association; and David Bailin, now head of alternative investments at US Trust, held similar responsibilities, without the title of president.
It’s easy to look back on it in hindsight and say that a bunch of people jumping ship in 2007 was a bad sign, but consider how it looked in the moment: the person leaving had been there 9 years, while the person replacing him had been there 12 years. That certainly doesn’t look so bad, especially when compared with a program (Winton) which is just getting started or a management team with 5 years or less of experience.
Adapt or Die (but careful with those adaptations)
Did hubris play a part? Again, from Greg Newton:
JWH generally has not changed the fundamental elements of the portfolios due to short-term performance, although adjustments may be, and have been, made over time. In addition, JWH has not changed the basic methodologies that identify signals in the markets for each program. JWH believes that its long-term track record has benefited substantially from its adherence to its models during and after periods of negative returns; however, adherence to its strategy may lead to prolonged periods of market losses and high risk, according to its current disclosure document.
Did a stubbornness to adhere to the models which had worked in the 80s, 90s, and start of this century cause those models to become outdated? That seems doubtful. As we say around here, “Systems don’t break, they just become more risky.” It would appear that this is exactly what happened to JWH. Of course, some on the risk management side of a successful CTA might say that a model becoming more risky is the same thing as that model breaking. After all, the risk is the most important part. And we wouldn’t argue too much there.
In the end, it looks like it may have been the worst of both worlds for Hentry: sticking with the base models but tweaking the position sizing. Per page 34 of the JWH D-doc, we learn that the position sizing has been changed 16 times across 9 programs since 2003. And these weren’t all position size reductions – many were increases. On one hand, if you are taking losses at a high trading level, then trying to gain those losses back at a reduced level, it’s going to take much longer to return to profitability. But if those losses we due to unresolved flaws in your trading method, raising your position sizes is just doubling down on a losing strategy.
Live and Die by the Volatility
Most of those in the industry will tell you John W. Henry was simply too volatile for modern tastes, and you can see when taking a look at his programs’ track records some big numbers on both sides. Take the financials & metals 36% annualized volatility for example, or the multiple years with above 40% gains or more than -17% losses, and you can see that Henry’s model was one of high risk for high return.
But it’s more than just the fact that the JWH programs were volatile – what stands out is how much more volatile they were than “normal” and the fact that they were getting more volatile compared to the competition.
The above look at the ratio between the JWH composite’s rolling 12mo annualized volatility and that of the BarclayHedge CTA Index shows that the JWH programs were about 2.25 times more volatile, on average, than the index during their boom times (the first 20 years), and had jumped to 3.49 times more volatile, on average, in the past 8 years.
Again, this is something more easily seen with hindsight, but this is easy enough to analyze in real time. It’s especially concerning how volatile a program is not just in absolute terms, but in relation to its benchmark as well. And if it’s 5 times more volatile – as JWH was a few times in 2008 – you had better be sure you are getting 5 times more the return as well.
Which brings us to…
You have to make money
At the end of the day in this business (or any other), no amount of name recognition nor bulletproof due diligence can make up for the failure to make money for your clients over a five year period, and that, more than anything else, led to John W. Henry closing up shop.
Consider the Financials & Metals program again. Heading into 2005 the program had never experienced back-to-back losing years. In fact, only once had the program suffered more than 1 losing year in any 7 year period (losing two out of three between 92 and 94). The program then saw losses in three consecutive years between 2005 and 2007, and when including this year’s down performance, the program has now lost money in 5 of the past 7 years.
The three years of losses ending in 2007 are likely what led to Merrill pulling the plug in that year (right before the program experienced a big bounce back, but that’s a topic for later), but the table above shows that something is materially different in the past eight years when compared to the first 20 for the Financials & Metals program.
A CTA’s job is twofold. First, to generate absolute return performance, so that a customer who gives the program at least three years to do its job will be rewarded with positive performance. And second, to stay ahead of the competition.
It’s no easy task, to be sure, and John Henry’s gold-lined trash cans are probably filled with the brochures of contenders who tried and failed. But since 2004, it has been Henry’s programs which have failed on both counts. They haven’t remained positive across the bulk of the rolling three year periods, with some of the rolling three year returns falling below -20%. And while those years haven’t been kind to many other CTAs, JWH failed to stay ahead of the competition. They spent most of the past eight years with rolling 36 month returns below that of the BarclayHedge CTA Index.
Henry was lagging the index and seeing large negative 36 month returns as early as 2005, meaning there were chinks in the armor that appeared well before Merrill pulled the plug in 2007. But pulling the plug on an underperforming advisor has to be one of the hardest things to do for the individual investor. Especially when you are considering pulling the plug on a Hall of Famer.
It’s all Relative
It’s a zero sum game, as managed futures detractors like to say. But the reality is that it is not that black and white. There isn’t always one clear winner and one clear loser. It’s more like a few thousand winners, a few thousand losers, and many more in between.
The job of the investor, then, isn’t necessarily to find the winner and avoid the loser, but to find the one doing a better job of winning than the others. What does that mean? Providing return with less volatility, more consistency, experiencing smaller drawdowns, shorter drawdowns – the list goes on.
Which brings us back to Henry. You see, while he is up (big time) in the zero sum game overall, the biggest takeaway for us following this pseudo-autopsy on the John W. Henry programs was in how the program started to become one of the worst winners according to our ranking algorithm.
The biggest warning flag to us was seeing how his ranking fell despite the program going on to make new equity highs.
You see, we don’t just rank on performance – we rank on comparative performance, across many time frames, and incorporate risk metrics to normalize the performance across programs. So you not only have to do well – you have to play the game better than the next guy in terms of controlling risk, delivering consistency, and more.
The fact that the John Henry programs started to fall in our rankings after their 1999 drawdowns is a sign of poor relative performance. In other words, they weren’t just doing poorly because of a bad managed futures environment – they were doing poorly AND performing worse than their peers were in that same environment. You can get away with rough years, but you can’t do worse than your peers for an extended period of time and hope to stay in the game.
Don’t cry for Henry – he’s doing just fine: still worth $1.5 billion, and the 389th richest person in the US according to Forbes.
But do pay attention to the potential lessons within this story:
1. Past performance is not necessarily indicative of future results. It’s not just a disclaimer, and the performance of the Henry Financials & Metals program shows the reality of that – with winning years in 17 out of its first 20 years followed by losing ones in 5 out of 7.
2. Know what sort of program you are getting involved with. John Henry’s programs were notoriously high volatility, and willing to take larger losses in exchange for home-run type years - meaning losses of -20% and more shouldn’t have surprised anyone.
3. Beware the big brokerage house (Merrill Lynch types) selling a big brand name managed futures program. While Henry was a poster child for managed futures as late as 2004, there were warning signs for his programs well before that. The big brokerages believe they are being conservative when selecting the well-known program with a long history of success, but they could be better served identifying lesser-known programs with the risk and reward profile their clients want. They are often late to the party and late to get out.
4. Henry is still a Hall of Famer. Yeah, we know… we said there were warnings, his main program has our lowest ranking, and we wouldn’t recommend a JWH program for our clients. But having said all that, he also made a lot of money for a lot of people in his early days (and knowing how these things cycle he’ll likely go on to make himself another small fortune just by trading his own money). We’ve never met him, and don’t know what sort of person he is – but we’re willing to bet that many of the clients involved with him during the ‘80s and ‘90s still think he’s worthy of that hall of fame distinction.
Posted: January 24, 2016, 9:39 pm
The war on cash is escalating faster than many had imagined. Having documented the growing calls from the elites and propagandist explanations of the "benefits" to their serfs over the last few years, with China, and The IMF entering the "cashless society" call most recently, International Business Times reports that Norway - suffering from its own economic collapse as oil revenues crash - has joined its Scandi peers Denmark and Sweden in a call to "ban cash."
By way of background, as we explained previously, What exactly does a “war on cash” mean?
It means governments are limiting the use of cash and a variety of official-mouthpiece economists are calling for the outright abolition of cash. Authorities are both restricting the amount of cash that can be withdrawn from banks, and limiting what can be purchased with cash.
These limits are broadly called “capital controls.”
Why Now? Why are governments suddenly so keen to ban physical cash?
The answer appears to be that the banks and government authorities are anticipating bail-ins, steeply negative interest rates and hefty fees on cash, and they want to close any opening regular depositors might have to escape these forms of officially sanctioned theft. The escape mechanism from bail-ins and fees on cash deposits is physical cash, and hence the sudden flurry of calls to eliminate cash as a relic of a bygone age — that is, an age when commoners had some way to safeguard their money from bail-ins and bankers’ control.
Forcing Those With Cash To Spend or Gamble Their Cash
The conventional answer voiced by Mr. Buiter is that recession and credit contraction result from households and enterprises hoarding cash instead of spending it. The solution to recession is thus to force all those stingy cash hoarders to spend their money.
And the benefits of a cashless society to banks and governments are self-evident:
1. Every financial transaction can be taxed.2. Every financial transaction can be charged a fee.3. Bank runs are eliminated.In fractional reserve systems such as ours, banks are only required to hold a fraction of their assets in cash. Thus a bank might only have 1 percent of its assets in cash. If customers fear the bank might be insolvent, they crowd the bank and demand their deposits in physical cash. The bank quickly runs out of physical cash and closes its doors, further fueling a panic.The federal government began insuring deposits after the Great Depression triggered the collapse of hundreds of banks, and that guarantee limited bank runs, as depositors no longer needed to fear a bank closing would mean their money on deposit was lost.But since people could conceivably sense a disturbance in the Financial Force and decide to turn digital cash into physical cash as a precaution, eliminating physical cash also eliminates the possibility of bank runs, as there will be no form of cash that isn’t controlled by banks.
So, when the dust has settled who ultimately benefits by this war on cash - government and the central banks, pure and simple.
Which explains why Norway's biggest bank, DNB, has called for the country to stop using cash which is just the latest move in a country that has been leading the global charge toward electronic money in recent years, with several banks already not offering cash in their branch offices and some industries seeking to cut back on paper currency.
DNB's proposal suggests eliminating the use of cash would cut down on black market sales and crimes such as money laundering.“Today, there is approximately 50 billion kroner in circulation and [the country’s central bank] Norges Bank can only account for 40 percent of its use. That means that 60 percent of money usage is outside of any control. We believe that is due to under-the-table money and laundering,” Trond Bentestuen, a DNB executive, told Norwegian website VG, the Local reported.“There are so many dangers and disadvantages associated with cash, we have concluded that it should be phased out,” he added.The country has already moved in this direction. Bentestuen estimated that only about 6 percent of Norwegians use cash on a daily basis, with the numbers higher among elderly people.
Norway’s Ministry of Finance is opposed to the proposal, however, and other critics have raised concerns about privacy issues as well as how the change would affect tourists. Privacy advocates in Norway have expressed worries for years that, without cash, there would be no way for an individual to purchase something without being tracked.
In 2014, Finans Norge, a financial industry organization in Norway, said the country was on pace to be a cashless society by 2020, Ice News reported. While DNB said its proposal will take time to complete, executives suggested the country start phasing out cash by discontinuing the 1,000 kroner note so it could focus on updating its banking system.
“Eighty-five percent of our customers say that they never or only very rarely go to the bank. Therefore we think it is a mistake to maintain a very old structure with local branch offices. It is better to follow the customers and improve the offers where the customers are: digital,” Bentestuen said.In the meantime, DNB and Norway’s second largest bank, Nordea, have already stopped using cash in their branch offices. And the movement toward a goal of no cash has been going on for a while. The Norwegian Hospitality Association pushed to eliminate consumers’ right to pay cash at all stores and restaurants in 2013, The Local reported.Other countries including Denmark and Sweden have made similar pushes as their populations also rely largely on electronic money.
If allowed to continue, state wealth control will exist.
And thus, as we concluded previously, if you can’t withdraw your money as cash, you have two choices: You can deal with negative interest rates...or you can spend your money. Ultimately, that’s what our Keynesian central planners want. They are using negative interest rates and the War on Cash to force you to spend and “stimulate” the economy.
If you ask us, these radical and insane measures are a sign of desperation.
The War on Cash and negative interest rates are huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.
Posted: January 24, 2016, 12:34 am
The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. It is named after the German economist Heinrich Freiherr von Stackelberg ...
Posted: January 23, 2016, 1:21 am
The United States Senate Select Committee to Study Governmental Operations with Respect to Intelligence Activities found in 1975 that the CIA submitted stories to the American press:
Wikipedia adds details:
After 1953, the network was overseen by Allen W. Dulles, director of the CIA. By this time, Operation Mockingbird had a major influence over 25 newspapers and wire agencies. The usual methodology was placing reports developed from intelligence provided by the CIA to witting or unwitting reporters. Those reports would then be repeated or cited by the preceding reporters which in turn would then be cited throughout the media wire services.The Office of Policy Coordination (OPC) was funded by siphoning off funds intended for the Marshall Plan [i.e. the rebuilding of Europe by the U.S. after WWII]. Some of this money was used to bribe journalists and publishers.
In 2008, the New York Times wrote:
During the early years of the cold war, [prominent writers and artists, from Arthur Schlesinger Jr. to Jackson Pollock] were supported, sometimes lavishly, always secretly, by the C.I.A. as part of its propaganda war against the Soviet Union. It was perhaps the most successful use of “soft power” in American history.
A CIA operative told Washington Post editor Philip Graham … in a conversation about the willingness of journalists to peddle CIA propaganda and cover stories:
You could get a journalist cheaper than a good call girl, for a couple hundred dollars a month.
Famed Watergate reporter Carl Bernstein wrote in 1977:
More than 400 American journalists … in the past twenty?five years have secretly carried out assignments for the Central Intelligence Agency, according to documents on file at CIA headquarters.***In many instances, CIA documents show, journalists were engaged to perform tasks for the CIA with the consent of the managements of America’s leading news organizations.***Among the executives who lent their cooperation to the Agency were [the heads of CBS, Time, the New York Times, the Louisville Courier?Journal, and Copley News Service. Other organizations which cooperated with the CIA include [ABC, NBC, AP, UPI, Reuters], Hearst Newspapers, Scripps?Howard, Newsweek magazine, the Mutual Broadcasting System, the Miami Herald and the old Saturday Evening Post and New York Herald?Tribune.***There is ample evidence that America’s leading publishers and news executives allowed themselves and their organizations to become handmaidens to the intelligence services. “Let’s not pick on some poor reporters, for God’s sake,” William Colby exclaimed at one point to the Church committee’s investigators. “Let’s go to the managements.***The CIA even ran a formal training program in the 1950s to teach its agents to be journalists. Intelligence officers were “taught to make noises like reporters,” explained a high CIA official, and were then placed in major news organizations with help from management.***Once a year during the 1950s and early 1960s, CBS correspondents joined the CIA hierarchy for private dinners and briefings.***Allen Dulles often interceded with his good friend, the late Henry Luce, founder of Time and Life magazines, who readily allowed certain members of his staff to work for the Agency and agreed to provide jobs and credentials for other CIA operatives who lacked journalistic experience.***In the 1950s and early 1960s, Time magazine’s foreign correspondents attended CIA “briefing” dinners similar to those the CIA held for CBS.***When Newsweek waspurchased by the Washington Post Company, publisher Philip L. Graham was informed by Agency officials that the CIA occasionally used the magazine for cover purposes, according to CIA sources. “It was widely known that Phil Graham was somebody you could get help from,” said a former deputy director of the Agency. “Frank Wisner dealt with him.” Wisner, deputy director of the CIA from 1950 until shortly before his suicide in 1965, was the Agency’s premier orchestrator of “black” operations, including many in which journalists were involved. Wisner liked to boast of his “mighty Wurlitzer,” a wondrous propaganda instrument he built, and played, with help from the press.)***In November 1973, after [the CIA claimed to have ended the program], Colby told reporters and editors from the New York Times and the Washington Star that the Agency had “some three dozen” American newsmen “on the CIA payroll,” including five who worked for “general?circulation news organizations.” Yet even while the Senate Intelligence Committee was holding its hearings in 1976, according to high?level CIA sources, the CIA continued to maintain ties with seventy?five to ninety journalists of every description—executives, reporters, stringers, photographers, columnists, bureau clerks and members of broadcast technical crews. More than half of these had been moved off CIA contracts and payrolls but they were still bound by other secret agreements with the Agency. According to an unpublished report by the House Select Committee on Intelligence, chaired by Representative Otis Pike, at least fifteen news organizations were still providing cover for CIA operatives as of 1976.***Those officials most knowledgeable about the subject say that a figure of 400 American journalists is on the low side ….“There were a lot of representations that if this stuff got out some of the biggest names in journalism would get smeared” ….
Former Newsweek and Associated Press reporter Robert Parry notes that Ronald Reagan and the CIA unleashed a propaganda campaign in the 1980’s to sell the American public on supporting the Contra rebels, utilizing private players such as Rupert Murdoch to spread disinformation:
President Ronald Reagan meeting with media magnate Rupert Murdoch in the Oval Office on Jan. 18, 1983, with Charles Wick, director of the U.S. Information Agency, in the background. (Photo credit: Reagan presidential library)
In the 1980s, the Reagan administration was determined to “kick the Vietnam Syndrome,” the revulsion that many Americans felt for warfare after all those years in the blood-soaked jungles of Vietnam and all the lies that clumsily justified the war.So, the challenge for the U.S. government became: how to present the actions of “enemies” always in the darkest light while bathing the behavior of the U.S. “side” in a rosy glow. You also had to stage this propaganda theater in an ostensibly “free country” with a supposedly “independent press.”From documents declassified or leaked over the past several decades, including an unpublished draft chapter of the congressional Iran-Contra investigation, we now know a great deal about how this remarkable project was undertaken and who the key players were.Perhaps not surprisingly much of the initiative came from the Central Intelligence Agency, which housed the expertise for manipulating target populations through propaganda and disinformation. The only difference this time would be that the American people would be the target population.For this project, Ronald Reagan’s CIA Director William J. Casey sent his top propaganda specialist Walter Raymond Jr. to the National Security Council staff to manage the inter-agency task forces that would brainstorm and coordinate this “public diplomacy” strategy.Many of the old intelligence operatives, including Casey and Raymond, are now dead, but other influential Washington figures who were deeply involved by these strategies remain, such as neocon stalwart Robert Kagan, whose first major job in Washington was as chief of Reagan’s State Department Office of Public Diplomacy for Latin America.***Declassified documents now reveal how extensive Reagan’s propaganda project became with inter-agency task forces assigned to develop “themes” that would push American “hot buttons.” Scores of documents came out during the Iran-Contra scandal in 1987 and hundreds more are now available at the Reagan presidential library in Simi Valley, California.What the documents reveal is that at the start of the Reagan administration, CIA Director Casey faced a daunting challenge in trying to rally public opinion behind aggressive U.S. interventions, especially in Central America. Bitter memories of the Vietnam War were still fresh and many Americans were horrified at the brutality of right-wing regimes in Guatemala and El Salvador, where Salvadoran soldiers raped and murdered four American churchwomen in December 1980.The new leftist Sandinista government in Nicaragua also was not viewed with much alarm. After all, Nicaragua was an impoverished country of only about three million people who had just cast off the brutal dictatorship of Anastasio Somoza.So, Reagan’s initial strategy of bolstering the Salvadoran and Guatemalan armies required defusing the negative publicity about them and somehow rallying the American people into supporting a covert CIA intervention inside Nicaragua via a counterrevolutionary force known as the Contras led by Somoza’s ex-National Guard officers.Reagan’s task was made tougher by the fact that the Cold War’s anti-communist arguments had so recently been discredited in Vietnam. As deputy assistant secretary to the Air Force, J. Michael Kelly, put it, “the most critical special operations mission we have … is to persuade the American people that the communists are out to get us.”***According to the draft report, the CIA officer who was recruited for the NSC job had served as Director of the Covert Action Staff at the CIA from 1978 to 1982 and was a “specialist in propaganda and disinformation.”***Federal law forbade taxpayers’ money from being spent on domestic propaganda or grassroots lobbying to pressure congressional representatives. Of course, every president and his team had vast resources to make their case in public, but by tradition and law, they were restricted to speeches, testimony and one-on-one persuasion of lawmakers.But things were about to change. In a Jan. 13, 1983, memo, NSC Advisor Clark foresaw the need for non-governmental money to advance this cause. “We will develop a scenario for obtaining private funding,” Clark wrote. (Just five days later, President Reagan personally welcomed media magnate Rupert Murdoch into the Oval Office for a private meeting, according to records on file at the Reagan library.)As administration officials reached out to wealthy supporters, lines against domestic propaganda soon were crossed as the operation took aim not only at foreign audiences but at U.S. public opinion, the press and congressional Democrats who opposed funding the Nicaraguan Contras.At the time, the Contras were earning a gruesome reputation as human rights violators and terrorists. To change this negative perception of the Contras as well as of the U.S.-backed regimes in El Salvador and Guatemala, the Reagan administration created a full-blown, clandestine propaganda network.In January 1983, President Reagan took the first formal step to create this unprecedented peacetime propaganda bureaucracy by signing National Security Decision Directive 77, entitled “Management of Public Diplomacy Relative to National Security.” Reagan deemed it “necessary to strengthen the organization, planning and coordination of the various aspects of public diplomacy of the United States Government.”Reagan ordered the creation of a special planning group within the National Security Council to direct these “public diplomacy” campaigns. The planning group would be headed by the CIA’s Walter Raymond Jr. and one of its principal arms would be a new Office of Public Diplomacy for Latin America, housed at the State Department but under the control of the NSC.***In the memo to then-U.S. Information Agency director Charles Wick, Raymond also noted that “via Murdock [sic] may be able to draw down added funds” to support pro-Reagan initiatives. Raymond’s reference to Rupert Murdoch possibly drawing down “added funds” suggests that the right-wing media mogul had been recruited to be part of the covert propaganda operation. During this period, Wick arranged at least two face-to-face meetings between Murdoch and Reagan.***Alarmed at a CIA director participating so brazenly in domestic propaganda, Raymond wrote that “I philosophized a bit with Bill Casey (in an effort to get him out of the loop)” but with little success.***Another part of the office’s job was to plant “white propaganda” in the news media through op-eds secretly financed by the government. In one memo, Jonathan Miller, a senior public diplomacy official, informed White House aide Patrick Buchanan about success placing an anti-Sandinista piece in The Wall Street Journal’s friendly pages. “Officially, this office had no role in its preparation,” Miller wrote.Other times, the administration put out “black propaganda,” outright falsehoods. In 1983, one such theme was designed to anger American Jews by portraying the Sandinistas as anti-Semitic because much of Nicaragua’s small Jewish community fled after the revolution in 1979.However, the U.S. embassy in Managua investigated the charges and “found no verifiable ground on which to accuse the GRN [the Sandinista government] of anti-Semitism,” according to a July 28, 1983, cable. But the administration kept the cable secret and pushed the “hot button” anyway.***As one NSC official told me, the campaign was modeled after CIA covert operations abroad where a political goal is more important than the truth. “They were trying to manipulate [U.S.] public opinion … using the tools of Walt Raymond’s trade craft which he learned from his career in the CIA covert operation shop,” the official admitted.Another administration official gave a similar description to The Miami Herald’s Alfonso Chardy. “If you look at it as a whole, the Office of Public Diplomacy was carrying out a huge psychological operation, the kind the military conduct to influence the population in denied or enemy territory,” that official explained. [For more details, see Parry’sLost History.]
Parry notes that many of the same people that led Reagan’s domestic propaganda effort in the 1980’s are in power today:
While the older generation that pioneered these domestic propaganda techniques has passed from the scene, many of their protégés are still around along with some of the same organizations. The National Endowment for Democracy, which was formed in 1983 at the urging of CIA Director Casey and under the supervision of Walter Raymond’s NSC operation, is still run by the same neocon, Carl Gershman, and has an even bigger budget, now exceeding $100 million a year.Gershman and his NED played important behind-the-scenes roles in instigating the Ukraine crisis by financing activists, journalists and other operatives who supported the coup against elected President Yanukovych. The NED-backed Freedom House also beat the propaganda drums. [See Consortiumnews.com’s “A Shadow Foreign Policy.”]Two other Reagan-era veterans, Elliott Abrams and Robert Kagan, have both provided important intellectual support for continuing U.S. interventionism around the world. Earlier this year, Kagan’s article for The New Republic, entitled “Superpowers Don’t Get to Retire,” touched such a raw nerve with President Obama that he hosted Kagan at a White House lunch and crafted the presidential commencement speech at West Point to deflect some of Kagan’s criticism of Obama’s hesitancy to use military force.***Rupert Murdoch’s media empire is bigger than ever ….
An expert on propaganda testified under oath during trial that the CIA now employs THOUSANDS of reporters and OWNS its own media organizations. Whether or not his estimate is accurate, it is clear that many prominent reporters still report to the CIA.
John Pilger is a highly-regarded journalist (the BBC’s world affairs editor John Simpson remarked, “A country that does not have a John Pilger in its journalism is a very feeble place indeed”). Pilger said in 2007:
We now know that the BBC and other British media were used by the British secret intelligence service MI-6. In what they called Operation Mass Appeal, MI-6 agents planted stories about Saddam’s weapons of mass destruction, such as weapons hidden in his palaces and in secret underground bunkers. All of these stories were fake.***One of my favorite stories about the Cold War concerns a group of Russian journalists who were touring the United States. On the final day of their visit, they were asked by the host for their impressions. “I have to tell you,” said the spokesman, “that we were astonished to find after reading all the newspapers and watching TV day after day that all the opinions on all the vital issues are the same. To get that result in our country we send journalists to the gulag. We even tear out their fingernails. Here you don’t have to do any of that. What is the secret?”
Nick Davies wrote in the Independent in 2008:
For the first time in human history, there is a concerted strategy to manipulate global perception. And the mass media are operating as its compliant assistants, failing both to resist it and to expose it.The sheer ease with which this machinery has been able to do its work reflects a creeping structural weakness which now afflicts the production of our news. I’ve spent the last two years researching a book about falsehood, distortion and propaganda in the global media.The “Zarqawi letter” which made it on to the front page of The New York Times in February 2004 was one of a sequence of highly suspect documents which were said to have been written either by or to Zarqawi and which were fed into news media.This material is being generated, in part, by intelligence agencies who continue to work without effective oversight; and also by a new and essentially benign structure of “strategic communications” which was originally designed by doves in the Pentagon and Nato who wanted to use subtle and non-violent tactics to deal with Islamist terrorism but whose efforts are poorly regulated and badly supervised with the result that some of its practitioners are breaking loose and engaging in the black arts of propaganda.***The Pentagon has now designated “information operations” as its fifth “core competency” alongside land, sea, air and special forces. Since October 2006, every brigade, division and corps in the US military has had its own “psyop” element producing output for local media. This military activity is linked to the State Department’s campaign of “public diplomacy” which includes funding radio stations and news websites. In Britain, the Directorate of Targeting and Information Operations in the Ministry of Defence works with specialists from 15 UK psyops, based at the Defence Intelligence and Security School at Chicksands in Bedfordshire.In the case of British intelligence, you can see this combination of reckless propaganda and failure of oversight at work in the case of Operation Mass Appeal. This was exposed by the former UN arms inspector Scott Ritter, who describes in his book, Iraq Confidential, how, in London in June 1998, he was introduced to two “black propaganda specialists” from MI6 who wanted him to give them material which they could spread through “editors and writers who work with us from time to time”.
The government is still paying off reporters to spread disinformation. And the corporate media are acting like virtual “escort services” for the moneyed elites, selling access – for a price – to powerful government officials, instead of actually investigating and reporting on what those officials are doing.
One of the ways that the U.S. government spreads propaganda is by making sure that it gets its version out first. For example, the head of the U.S. Information Agency’s television and film division – Alvin A. Snyder – wrote in his book Warriors of Disinformation: How Lies, Videotape, and the USIA Won the Cold War:
All governments, including our own, lie when it suits their purposes. The key is to lie first.***Another casualty, always war’s first, was the truth. The story of [the accidental Russian shootdown of a Korean airliner] will be remembered pretty much the way we told it in 1983, not the way it really happened.
In 2013, the American Congress repealed the formal ban against the deployment of propaganda against U.S. citizens living on American soil. So there’s even less to constrain propaganda than before.
Another key to American propaganda is the constant repetition of propaganda. As Business Insider reported in 2013:
Lt. Col. Daniel Davis, a highly-respected officer who released a critical report regarding the distortion of truth by senior military officials in Iraq and Afghanistan ….From Lt. Col. Davis:In context, Colonel Leap is implying we ought to change the law to enable Public Affairs officers to influence American public opinion when they deem it necessary to “protect a key friendly center of gravity, to wit US national will.”The Smith-Mundt Modernization Act of 2012 appears to serve this purpose by allowing for the American public to be a target audience of U.S. government-funded information campaigns.Davis also quotes Brigadier General Ralph O. Baker — the Pentagon officer responsible for the Department of Defense’s Joint Force Development — who defines Information Operations (IO) as activities undertaken to “shape the essential narrative of a conflict or situation and thus affect the attitudes and behaviors of the targeted audience.”Brig. Gen. Baker goes on to equate descriptions of combat operations with the standard marketing strategy of repeating something until it is accepted:For years, commercial advertisers have based their advertisement strategies on the premise that there is a positive correlation between the number of times a consumer is exposed to product advertisement and that consumer’s inclination to sample the new product. The very same principle applies to how we influence our target audiences when we conduct COIN.And those “thousands of hours per week of government-funded radio and TV programs” appear to serve Baker’s strategy, which states: “Repetition is a key tenet of IO execution, and the failure to constantly drive home a consistent message dilutes the impact on the target audiences.”
Of course, the Web has become a huge media platform, and the Pentagon and other government agencies are influencing news on the web as well. Documents released by Snowden show that spies manipulate polls, website popularity and pageview counts, censor videos they don’t like and amplify messages they do.
The CIA and other government agencies also put enormous energy into pushing propaganda through movies, television and video games.
In 2012, the Pentagon launched a massive smear campaign against USA Today reporters investigating unlawful domestic propaganda by the Pentagon.
(1) One of the most common uses of propaganda is to sell unnecessary and counter-productive wars. Given that the American media is always pro-war, mainstream publishers, producers, editors, and reporters are willing participants.
(2) Indeed, the media provides so little insight into opinions contrary to the status quo that a history professor says that it "has rendered the constitutional right of free press ineffectual".
(3) A 4-part BBC documentary called the “Century of the Self” shows that an American – Freud’s nephew, Edward Bernays – created the modern field of manipulation of public perceptions, and the U.S. government has extensively used his techniques.
(4) Sometimes, the government plants disinformation in American media in order to mislead foreigners. For example, an official government summary of America’s overthrow of the democratically-elected president of Iran in the 1950′s states, “In cooperation with the Department of State, CIA had several articles planted in major American newspapers and magazines which, when reproduced in Iran, had the desired psychological effect in Iran and contributed to the war of nerves against Mossadeq” (page x).
Posted: January 19, 2016, 6:25 pm
63. Minutes of Secretary of State Kissinger's Principals and Regionals Staff Meeting1
Washington, April 25, 1974, 3:13–4:16 p.m.
[Omitted here is discussion unrelated to international monetary policy.]
Secretary Kissinger: Now we've got Enders, Lord and Hartman. They'll speak separately or together. (Laughter.)
Mr. Hartman: A trio.
Mr. Lord: I can exhaust my knowledge of gold fairly quickly, I think.
Secretary Kissinger: Now, I had one deal with Shultz—never to discuss gold at this staff meeting—because his estimate of what would appear in the newspapers from staff meetings is about the same as mine.
Are you going to discuss something—is this now in the public discussion, what we're discussing here?
Mr. Enders: It's been very close to it. It's been in the newspapers now—the EC proposal.2
Secretary Kissinger: On what—revaluing their gold?
Mr. Enders: Revaluing their gold—in the individual transaction between the central banks. That's been in the newspaper. The subject is, obviously, sensitive; but it's not, I think, more than the usual degree of sensitivity about gold.
Secretary Kissinger: Now, what is our position?
Mr. Enders: You know what the EC proposal is.
Secretary Kissinger: Yes.
Mr. Enders: It does not involve a change in the official price of gold. It would allow purchases and sales to the private market, provided there was no net purchase from the private market by an individual central banker in a year. And then there would be individual sales between the central banks on—
Secretary Kissinger: How can they permit sale to the private market? Oh, and then they would buy from the private market?
Mr. Enders: Then they would buy.
Secretary Kissinger: But they wouldn't buy more than they sold.
Mr. Enders: They wouldn't buy more than they sold. There would be no net increase in gold held by the central banks that was held by the EEC. It could be held by others.
I've got two things to say about this, Mr. Secretary. One is: If it happens, as they proposed, it would be against our interests in these ways.
Secretary Kissinger: Have you accepted it or is this just a French proposal?
Mr. Enders: It's an informal consensus that they've reached among themselves.
Secretary Kissinger: Were they discussed with us at all?
Mr. Enders: Not in a systematic way. They're proposing to send over to Washington the Dutch Finance Minister and the Dutch Central Governor would talk to the Treasury.
Secretary Kissinger: What's Arthur Burns' view?
Mr. Enders: Arthur Burns—I talked to him last night on it, and he didn't define a general view yet. He was unwilling to do so. He said he wanted to look more closely on the proposal. Henry Wallich, the international affairs man, this morning indicated he would probably adopt the traditional position that we should be for phasing gold out of the international monetary system; but he wanted to have another look at it. So Henry Wallich indicated that they would probably come down opposing this. But he was not prepared to do so until he got a further look at it.
Secretary Kissinger: But the practical consequence of this is to revalue their gold supply.
Mr. Enders: Precisely.
Secretary Kissinger: Their gold reserves.
Mr. Enders: That's right. And it would be followed quite closely by a proposal within a year to have an official price of gold—
Secretary Kissinger: It doesn't make any difference anyway. If they pass gold at the market price, that in effect establishes a new official price.
Mr. Enders: Very close to it—although their—
Secretary Kissinger: But if they ask what they're doing—let me just say economics is not my forte. But my understanding of this proposal would be that they—by opening it up to other countries, they're in effect putting gold back into the system at a higher price.
Mr. Enders: Correct.
Secretary Kissinger: Now, that's what we have consistently opposed.
Mr. Enders: Yes, we have. You have convertibility if they—
Secretary Kissinger: Yes.
Mr. Enders: Both parties have to agree to this. But it slides towards and would result, within two or three years, in putting gold back into the centerpiece of the system—one. Two—at a much higher price. Three—at a price that could be determined by a few central bankers in deals among themselves.
So, in effect, I think what you've got here is you've got a small group of bankers getting together to obtain a money printing machine for themselves. They would determine the value of their reserves in a very small group.
There are two things wrong with this.
Secretary Kissinger: And we would be on the outside.
Mr. Enders: We could join this too, but there are only very few countries in the world that hold large amounts of gold—United States and Continentals being most of them. The LDC's and most of the other countries—to include Japan—have relatively small amounts of gold. So it would be highly inflationary, on the one hand—and, on the other hand, a very inequitable means of increasing reserves.
Secretary Kissinger: Why did the Germans agree to it?
Mr. Enders: The Germans agreed to it, we've been told, on the basis that it would be discussed with the United States—conditional on United States approval.
Secretary Kissinger: They would be penalized for having held dollars.
Mr. Enders: They would be penalized for having held dollars. That probably doesn't make very much difference to the Germans at the present time, given their very high reserves. However, I think that they may have come around to it on the basis that either we would oppose it—one—or, two, that they would have to pay up and finance the deficits of France and Italy by some means anyway; so why not let them try this proposal first?
The EC is potentially divided on this, however, and if enough pressure is put on them, these differences should reappear.
Secretary Kissinger: Then what's our policy?
Mr. Enders: The policy we would suggest to you is that, (1), we refuse to go along with this—
Secretary Kissinger: I am just totally allergic to unilateral European decisions that fundamentally affect American interests—taken without consultation of the United States. And my tendency is to smash any attempt in which they do it until they learn that they can't do it without talking to us.
That would be my basic instinct, apart from the merits of the issue.
Mr. Enders: Well, it seems to me there are two things here. One is that we can't let them get away with this proposal because it's for the reasons you stated. Also, it's bad economic policy and it's against our fundamental interests.
Secretary Kissinger: There's also a fundamental change of our policy that we pursued over recent years—or am I wrong there?
Mr. Enders: Yes.
Secondly, Mr. Secretary, it does present an opportunity though—and we should try to negotiate for this—to move towards a demonetization of gold, to begin to get gold moving out of the system.
Secretary Kissinger: But how do you do that?
Mr. Enders: Well, there are several ways. One way is we could say to them that they would accept this kind of arrangement, provided that the gold were channelled out through an international agency—either in the IMF or a special pool—and sold into the market, so there would be gradual increases.
Secretary Kissinger: But the French would never go for this.
Mr. Enders: We can have a counter-proposal. There's a further proposal—and that is that the IMF begin selling its gold—which is now 7 billion—to the world market, and we should try to negotiate that. That would begin the demonetization of gold.
Secretary Kissinger: Why are we so eager to get gold out of the system?
Mr. Enders: We were eager to get it out of the system—get started—because it's a typical balancing of either forward or back. If this proposal goes back, it will go back into the centerpiece system.
Secretary Kissinger: But why is it against our interests? I understand the argument that it's against our interest that the Europeans take a unilateral decision contrary to our policy. Why is it against our interest to have gold in the system?
Mr. Enders: It's against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings—about 11 billion—a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We've been trying to get away from that into a system in which we can control—
Secretary Kissinger: But that's a balance of payments problem.
Mr. Enders: Yes, but it's a question of who has the most leverage internationally. If they have the reserve-creating instrument, by having the largest amount of gold and the ability to change its price periodically, they have a position relative to ours of considerable power. For a long time we had a position relative to theirs of considerable power because we could change gold almost at will. This is no longer possible—no longer acceptable. Therefore, we have gone to special drawing rights, which is also equitable and could take account of some of the LDC interests and which spreads the power away from Europe. And it's more rational in—
Secretary Kissinger: "More rational" being defined as being more in our interests or what?
Mr. Enders: More rational in the sense of more responsive to worldwide needs—but also more in our interest by letting—
Secretary Kissinger: Would it shock you? I've forgotten how SDR's are generated. By agreement?
Mr. Enders: By agreement.
Secretary Kissinger: There's no automatic way?
Mr. Enders: There's no automatic way.
Mr. Lord: Maybe some of the Europeans—but the LDC's are on our side and would not support them.
Mr. Enders: I don't think anybody would support them. Secretary Kissinger: But could they do it anyway?
Mr. Enders: Yes. But in order for them to do it anyway, they would have to be in violation of important articles of the IMF. So this would not be a total departure. (Laughter.) But there would be reluctance on the part of some Europeans to do this.
We could also make it less interesting for them by beginning to sell our own gold in the market, and this would put pressure on them.
Mr. Maw: Why wouldn't that fit if we start to sell our own gold at a price?
Secretary Kissinger: But how the hell could this happen without our knowing about it ahead of time?
Mr. Hartman: We've had consultations on it ahead of time. Several of them have come to ask us to express our views. And I think the reason they're coming now to ask about it is because they know we have a generally negative view.
Mr. Enders: So I think we should try to break it, I think, as a first position—unless they're willing to assign some form of demonetizing arrangement.
Secretary Kissinger: But, first of all, that's impossible for the French.
Mr. Enders: Well, it's impossible for the French under the Pompidou Government. Would it be necessarily under a future French Government? We should test that.
Secretary Kissinger: If they have gold to settle current accounts, we'll be faced, sooner or later, with the same proposition again. Then others will be asked to join this settlement thing.
Isn't this what they're doing?
Mr. Enders: It seems to me, Mr. Secretary, that we should try—not rule out, a priori, a demonetizing scenario, because we can both gain by this. That liberates gold at a higher price. We have gold, and some of the Europeans have gold. Our interests join theirs. This would be helpful; and it would also, on the other hand, gradually remove this dominant position that the Europeans have had in economic terms.
Secretary Kissinger: Who's with us on demonetizing gold?
Mr. Enders: I think we could get the Germans with us on demonetizing gold, the Dutch and the British, over a very long period of time.
Secretary Kissinger: How about the Japs?
Mr. Enders: Yes. The Arabs have shown no great interest in gold.
Secretary Kissinger: We could stick them with a lot of gold.
Mr. Sisco: Yes. (Laughter.)
Mr. Sonnenfeldt: At those high-dollar prices. I don't know why they'd want to take it.
Secretary Kissinger: For the bathroom fixtures in the Guest House in Rio. (Laughter.)
Mr. McCloskey: That'd never work.
Secretary Kissinger: That'd never work. Why it could never get the bathtub filled—it probably takes two weeks to fill it.
Mr. Sisco: Three years ago, when Jean3 was in one of those large bathtubs, two of those guys with speakers at that time walked right on through. She wasn't quite used to it. (Laughter.)
Secretary Kissinger: They don't have guards with speakers in that house.
Mr. Sisco: Well, they did in '71.
Mr. Brown: Usually they've been fixed in other directions.
Mr. Sisco: Sure. (Laughter.)
Secretary Kissinger: O.K. My instinct is to oppose it. What's your view, Art?
Mr. Hartman: Yes. I think for the present time, in terms of the kind of system that we're going for, it would be very hard to defend in terms of how.
Secretary Kissinger: Ken?
Mr. Rush: Well, I think probably I do. The question is: Suppose they go ahead on their own anyway. What then?
Secretary Kissinger: We'll bust them.
Mr. Enders: I think we should look very hard then, Ken, at very substantial sales of gold—U.S. gold on the market—to raid the gold market once and for all.
Mr. Rush: I'm not sure we could do it.
Secretary Kissinger: If they go ahead on their own against our position on something that we consider central to our interests, we've got to show them that that they can't get away with it. Hopefully, we should have the right position. But we just cannot let them get away with these unilateral steps all the time.
Mr. Lord: Does the Treasury agree with us on this? I mean, if this guy comes when the Secretary is out of the country—
Secretary Kissinger: Who's coming?
Mr. Enders: The Dutch Finance Minister—Duisenberg—and Zijlstra. I think it will take about two weeks to work through a hard position on this. The Treasury will want our leadership on the hardness of it. They will accept our leadership on this. It will take, I would think, some time to talk it through or talk it around Arthur Burns, and we'll have to see what his reaction is.
Mr. Rush: We have about 45 billion dollars at the present value—
Mr. Enders: That's correct.
Mr. Rush: And there's about 100 billion dollars of gold.
Mr. Enders: That's correct. And the annual turnover in the gold market is about 120 billion.
Secretary Kissinger: The gold market is generally in cahoots with Arthur Burns.
Mr. Enders: Yes. That's been my experience. So I think we've got to bring Arthur around.
Secretary Kissinger: Arthur is a reasonable man. Let me talk to him. It takes him a maddening long time to make a point, but he's a reasonable man.
Mr. Enders: He hasn't had a chance to look at the proposal yet.
Secretary Kissinger: I'll talk to him before I leave.4
Mr. Enders: Good.
Mr. Boeker: It seems to me that gold sales is perhaps Stage 2 in a strategy that might break up the European move—that Stage 1 should be formulating a counterproposal U.S. design to isolate those who are opposing it the hardest—the French and the Italians. That would attract considerable support. It would appeal to the Japanese and others. I think this could fairly easily be done. And that, in itself, should put considerable pressure on the EEC for a tentative consensus.
Mr. Hartman: It isn't a confrontation. That is, it seems to me we can discuss the various aspects of this thing.
Secretary Kissinger: Oh, no. We should discuss it—obviously. But I don't like the proposition of their doing something and then inviting other countries to join them.
Mr. Hartman: I agree. That's not what they've done.
Mr. Sonnenfeldt: Can we get them to come after the French election5 so we don't get kicked in the head?
Mr. Rush: I would think so.
Secretary Kissinger: I would think it would be a lot better to discuss it after the French election. Also, it would give us a better chance. Why don't you tell Simon this?
Mr. Enders: Good.
Secretary Kissinger: Let them come after the French election.
Mr. Enders: Good. I will be back—I can talk to Simon. I guess Shultz will be out then.6
Mr. Sonnenfeldt: He'll be out the 4th of May.
Mr. Enders: Yes. Meanwhile, we'll go ahead and develop a position on the basis of this discussion.
Secretary Kissinger: Yes.
Mr. Enders: Good.
Secretary Kissinger: I agree we shouldn't get a consultation—as long as we're talking Treasury, I keep getting pressed for Treasury chair-manship of a policy committee. You're opposed to that?7
[Omitted here is discussion unrelated to international monetary policy.]
1 Source: National Archives, RG 59, Transcripts of Secretary of State Kissinger's Staff Meetings, 1973–1977, Entry 5177, Box 3, Secretary's Staff Meeting, April 25, 1974. Secret. According to an attached list, the following people attended the meeting: Kissinger, Rush, Sisco, Ingersoll, Hartman, Maw, Ambassador at Large Robert Mc-Closkey, Assistant Secretary of State for African Affairs Donald Easum, Hyland, Atherton, Lord, Policy Planning Staff member Paul Boeker, Eagleburger, Springsteen, Special Assistant to the Secretary of State for Press Relations Robert Anderson, Enders, Assistant Secretary of State for Inter-American Affairs Jack Kubisch, and Sonnenfeldt.
2 Meeting in Zeist, the Netherlands, on April 22 and 23, EC Finance Ministers and central bankers agreed on a common position on gold, which they authorized the Dutch Minister of Finance, Willem Frederik Duisenberg, and the President of the Dutch central bank, Jelle Zijlstra, to discuss with Treasury and Federal Reserve Board officials in Washington. (Telegram 2042 from The Hague, April 24, and telegram 2457 from USEC Brussels, April 25; ibid., Central Foreign Policy Files)
3 Jean Sisco was Joseph Sisco's wife.
4 From April 28 to 29, Kissinger was in Geneva for talks with Soviet Foreign Minister Andrei Gromyko.
5 France held a Presidential election on May 19.
6 George Shultz's tenure as Secretary of the Treasury ended on May 8, when he was replaced by William Simon.
7 The summary attached to the front page of the minutes notes that "The Secretary is inclined to oppose the proposal on grounds of non consultation by the Europeans as well as on the proposal's merits. The Secretary agreed to talk to Arthur Burns in this sense."
Posted: January 18, 2016, 3:05 am
David Smith won’t soon forget his 38th-birthday party.
Standing on the grounds of an estate in Kingston, Jamaica, in front of a throng of some 200 investors in his foreign-exchange-trading fund, Smith listened sheepishly as his mentor and hero, Jared Martinez, compared him to Moses leading his flock to the promised land. “I wanted to buy something like the staff that Moses used to carry,” said Martinez, whose remarks have been preserved on video. “David has freed so many people down here,” Martinez told the crowd, referring to Smith’s 10 percent monthly returns. “David, we’d like to say thank you for being our Jamaican Moses.”
Smith, now 46, recalls the moment as fraught with mixed emotions, Bloomberg Marketsreports in its June 2015 issue. The charismatic Martinez, 59, who runs the oldest and largest trading school in the U.S. serving the lightly regulated $400 billion–a-day retail forex market, had grown into a trusted father figure for Smith. Under Martinez’s tutelage, Smith had succeeded in expanding his fund and increasing his personal fortune enough to afford a $2 million seaside mansion and a Learjet. Yet Smith knew he was no Moses. His fund was a fraud.
Three years later, in August 2010, U.S. prosecutors alleged Smith and his co-conspirators laundered more than $200 million of investor money through multiple U.S. bank accounts created by Martinez and two of his sons. Those transactions were the basis of 19 counts of money laundering and conspiracy against Smith, with Martinez and his sons identified as unindicted co-conspirators. Smith was also charged with four counts of fraud.
Smith sees himself as a victim—a con man duped by another con man who proved more savvy. Smith met with aBloomberg Markets reporter in January in a detention facility on the Turks and Caicos island of Providenciales, a tourist mecca for beachgoers and snorkelers. He says he admitted guilt as part of aplea bargain with U.S. prosecutors filed in March 2011, expecting to testify against Martinez and his two sons, Isaac, now 31, and Jacob, now 34. He had already been convicted and sentenced to 6½ years in a Turks and Caicos prison and was hoping for leniency.
The Martinez family was never charged and in August 2011, a U.S. federal judge in Orlando sentenced Smith to a concurrent 30-year term. Smith is fighting extradition to the U.S. Martinez’s brokerage was fined $250,000 by the National Futures Association, a self-regulatory group, for failing to investigate Smith’s operation.
“Once I decided I’d plead guilty, there was no holding back,” Smith says, locked up just a few miles from the turquoise waters and seaside villa where he often entertained the Martinez family. “I went all the way. I did everything they asked me to do. I got nothing in return.”
Smith doesn’t deny that he committed a crime. He has confessed to defrauding some 6,000 people out of $220 million when his Ponzi scheme collapsed. He just thinks that if he has to take up residence in a U.S. prison, he should have gotten a reduced sentence in exchange for his cooperation.
Ten years ago, Martinez accepted Smith as a student at his forex-trading school outside Orlando. Martinez then followed Smith to his native Jamaica to sell classes to his investors. In classic Ponzi-scheme fashion, Smith used money from new investors to pay off his existing clients, much of it laundered through Martinez-controlled accounts, according to prosecutors. Smith contends Martinez outsmarted prosecutors by claiming he and his sons had no knowledge that they were laundering money for Smith. Martinez and his two sons declined to comment for this story. “I really felt this man was genuine, that he loved me like a son,” says Smith. “He just threw me under the bus.”
Smith’s plea agreement describes wiring more than $100 million of investor funds from Turks and Caicos to I-Trade FX, a brokerage firm he owned in Florida with the Martinez family. Cash flowed through JPMorgan Chase, Bank of America, and other banks before circling back to the Caribbean. Almost no foreign exchange was traded.
“It was a huge washing machine,” says Assistant U.S. Attorney Bruce Ambrose, who prosecuted Smith for money laundering. Yet he didn’t seek to indict Martinez family members he identified as co-conspirators. Ambrose would not explain why. The U.S. Attorney’s office later issued a statement to Bloomberg Markets saying it stands by its decision not to prosecute the family, saying Smith did not fully cooperate. Moreover, “the statute of limitations has long since expired for charging anyone who may have been involved in criminal activity with Mr. Smith,” it said.
Law enforcement agents from the U.S., Jamaica, and Turks and Caicos say that the Martinez family actively participated in Smith’s criminal enterprise, and they were stunned that U.S. prosecutors never charged the father and sons.
“It was a great case,” says Louis Skenderis, a special agent with the U.S. Department of Homeland Security, who spent three years investigating the family’s role in helping Smith move cash in and out of the U.S. “We brought David to Florida as a witness against the Martinezes, and he agreed to plead guilty as part of the deal.”
“I think David Smith is just a pawn,” says Janice Holness, executive director ofJamaica’s Financial Services Commission, interviewed at her office in Kingston. “Smith is a crook and got what he deserves, but there are bigger fish. He’s taking a fall for these people, including Jared Martinez.”
Martinez has said that’s simply not true. “It’s difficult to be falsely accused of anything,” he said in an October 2011 press release, two months after Smith was sentenced. “And it is unfortunate that we were perceived to be guilty by association.”
Martinez, whose Florida license plate reads “FX Chief,” says he has earned millions of dollars trading and running forex classes at his Market Traders Institute, which he founded in 1994 and which employs 115 workers. Dozens of telemarketers hawk his classes. He says he’s taught 30,000 students a formula for making consistent profits with MTI’s Ultimate Traders Package, which sells for $7,995. Yet, in an interview withBloomberg Markets last year, Martinez estimated no more than half his customers make back trading what they spend on their MTI tuition.
Martinez also said the retail forex industry is cleaner now than it was a decade ago. “Ten years ago, it was the Wild West,” he said. “Ponzi schemes were running rampant.” (See “The Currency Casino,” December 2014.)
Smith, dressed in blue gym shorts and a baggy gray T-shirt in the Providenciales police station, described how he turned from a legitimate if failed forex trader to a criminal who put all his hopes in one friendship. He grew up in a middle-class family in Kingston, the son of two high school science teachers. When he was 24, Smith took a job as a trader for a financial firm called Jamaica Money Market Brokers. While working there, he also earned a B.S. in business from Nova Southeastern University’s Jamaica campus. Two years later, in 2003, Smith was let go from the firm for what its marketing manager Kerry-Ann Stimpson describes as a breach of the firm’s “core values.” She declined to elaborate.
Smith set up a forex-trading company in 2005 called Olint, short for Overseas Locket International. Olint didn’t start out as a Ponzi scheme, he says. Smith just wasn’t very good at trading. “I lost a lot of money,” he says. “I could have declared losses and given back what was left, but I didn’t want to do that.” Instead, according to his plea agreement, he told clients that Olint accounts were earning returns averaging 10 percent a month. When the word spread, money from middle- and upper-class Jamaican investors poured in.
The losses, though, were piling up. “I stopped trading totally and started looking for education,” Smith says. Searching the Web, he discovered Martinez’s MTI. Smith flew to Orlando in April 2005 to take MTI’s four-day course, which promised to show students how to predict currency-trading patterns with “technical analysis”—reading and interpreting charts of, say, the dollar versus the euro’s past behavior.
When Martinez, who was born on the Blackfeet American Indian reservation in Montana, learned that Smith ran his own investment firm, he and Isaac approached Smith about forming a partnership, Martinez later told regulators. In February 2006, Smith invested $1 million to help fund I-Trade FX, the Martinez family’s new Florida-based forex brokerage.
Smith’s operation in Jamaica, run from a shopping mall storefront in downtown Kingston, was bustling. Olint was organized as an exclusive private club that accepted only new investors referred by members. Early investors received monthly e-mailed statements showing returns as high as 12 percent. To manage withdrawals, Smith says, he would decide returns to be paid each month. He would drag out payments during periods when requests for withdrawals increased. If plenty of new money was coming in, he would lower the return for that month. If withdrawals were rising, he would increase it in an effort to hold on to investors.
In March 2006, Smith’s scheme nearly unraveled. Following a tip by an investment banker, police and agents from Jamaica’s Financial Services Commission executed search warrants at Olint’s office, hauling off documents, cash, and computers, including a Bloomberg terminal. A cease-and-desist order banning Olint from opening new accounts soon followed from the FSC.
Smith invited nervous investors to pull out even though he knew he didn’t have enough to pay everyone. The gambit worked, quashing press reports that Olint was a Ponzi scheme. “The money flew back in,” quickly tripling Olint’s assets, Smith says. “If I’d gotten requests for another $1.1 million, I couldn’t have paid it,” he says.
No criminal charges were filed against Smith in Jamaica. That might have to do with the money he was spreading around the island in campaign contributions for local politicians—many of whom were also investors. Smith gave away more than $8 million of client money, according to court documents, including $5 million to the Jamaica Labour Party and $2 million to its rival, the Jamaican People’s National Party, which now controls the government. While the JLP says only its candidates received contributions from Smith, the PNP acknowledges receiving direct contributions.
Peter Bunting, the investment banker who brought the case to the attention of the police and who now serves as Jamaica’s national security minister, says Olint investors represented a who’s who of Jamaica, including politicians, businessmen, and judges. “The enmeshment with the official system was very substantial,” Bunting said at his Kingston office in February.
Olint needed to find an alternative to the Jamaican bank accounts that had been used to receive investor deposits, according to Smith’s plea agreement. A week after the cease-and-desist order, Martinez and his son Isaac, who served as president of the brokerage, asked the NFA to license I-Trade FX. The regulator awarded I-Trade a brokerage license in August 2006, and Smith began transferring funds to the firm.
Martinez, meanwhile, began conducting forex-trading seminars in Jamaica, capitalizing on the island’s buzz around Smith and Olint. Dominic Azan, who became MTI’s Jamaica sales manager, still remembers the electricity he felt in the summer of 2006 listening to Martinez onstage, his audience in thrall, as he talked up the trading success of MTI graduates. Azan felt reassured about the $1 million he and his family had invested in Olint— nearly all of which was later lost. “Who didn’t want to be part of it? Here’s the guru, the FX Chief himself, the guy who taught David how to trade,” says Azan, who recalls admiring Martinez’s Breitling watch collection and gleaming Rolls-Royce.
Martinez made the most of his opening: “TURN $2,000 INTO $10,000 in Twenty Days. Learn How!” urged an MTI advertisement in a Jamaican newspaper in September 2006. Students lined up for classes paid for by Smith: Olint paid $1.9 million to MTI for investors’ seminars, according to a report prepared for the Turks and Caicos government by PricewaterhouseCoopers. The result was a faithful following who believed so deeply in Smith and Martinez that they were willing to entrust their life savings to the pair. Smith says there is no doubt Martinez was aware of his scam. “He knew the money wasn’t being traded, and yet I was paying people 10 percent a month,” says Smith. “He knew it was a lie.”
Martinez later testified before the NFA that he was aware of David’s regulatory problems in Jamaica and had had more than 500 conversations about them. Still, he said he found nothing suspicious about Smith before the Ponzi scheme collapsed in 2008. “We did a substantial amount of due diligence,” Martinez told the NFA, which began a probe of I-Trade FX in 2007. He said he never asked to see proof of Smith’s returns. “Some people, especially Jamaicans, they can be very offended by that,” he explained.
Regulators have suggested Martinez should have known better. “Advertised returns of the magnitude Smith claimed are often fraudulent,” the NFA wrote in an April 2009 ruling. “I-Trade should have questioned them.”
Smith fled Jamaica’s regulatory heat in the summer of 2006, relocating 400 miles (644 kilometers) northeast to Turks and Caicos, where he used investors’ money to buy his family’s waterfront home on Providenciales. He also set up two new investment clubs to raise cash, which he wired to I-Trade in Florida.
In March 2007, the Martinez family opened JIJ Investments, a hedge fund incorporated in Florida as “an alternative depository” outside the purview of the NFA, according to Smith’s plea agreement. “Unindicted co-conspirators are the listed directors of the firm,” according to the criminal complaint. JIJ Investments’ directors were Jared, Isaac, and Jacob.
The Martinez family wired $76 million from I-Trade to its JIJ accounts at JPMorgan, Bank of America, and Wachovia Bank, later purchased by Wells Fargo. Each wire transfer was described as money laundering in the criminal complaint against Smith. None of the banks was accused of any wrongdoing.
While Smith operated from Turks and Caicos, the families remained close, according to NFA testimony by Isaac, who often stayed at Smith’s island house. “His kids called me Uncle Isaac,” he said. “I would fly with him on his private jet.” Smith says he and Isaac enjoyed deep-sea fishing for yellowtail snapper. Isaac told the NFA that he never knew about Smith’s illegal activities.
The good times ended in July 2008 when the Turks and Caicos police executed a search warrant at Smith’s home and office in Providenciales. Olint and its victims were the talk of the island.
Dominic’s father, Khaleel Azan, says he and Martinez often dined together. He says he appealed to Martinez in late 2007, when he couldn’t withdraw the family’s $1 million from Olint. “Jared told me, ‘I promise, we have over $100 million from David. I’ll make sure you get your money.’” But the family’s investment was lost.
Chris Walker, an Orlando obstetrician, also lost more than $1 million investing with Olint, and his father, Kenneth Walker, lost $1.5 million—his life savings. Chris Walker met Smith at a forex-trading seminar conducted by Martinez in Jamaica. He recalls Martinez ushering Smith up onto a podium in front of hundreds of attendees, at a hotel in Ocho Rios. “Jared introduced David like the Messiah, as the best student he’s ever had,” says Walker. He says he poured more cash into Olint after the seminar. “Jared is a very effective salesman,” Walker says.
Walker later sued Smith, as well as Martinez and his sons, in Florida state court, alleging fraud, but says he gave up after running out of money. “It boggles my mind why the Martinez family did not get indicted,” he says. “Why aren’t the co-conspirators behind bars?”
Smith was arrested in February 2009. In April 2009, I-Trade was fined $250,000 by the NFA for failing to sufficiently investigate suspicious activity by several customers, including Smith. A month later, I-Trade shut down, though Martinez’s forex school is still in business. In 2010, Isaac, as president and compliance officer of the firm, wasfined an additional $50,000 for failure to supervise. Jacob, meanwhile, was bannedfrom the industry for three years in 2012 and ordered to pay a $150,000 fine should he seek to return to the industry.
Smith didn’t get off so easily. In 2010, he was convicted of Ponzi-related crimes in Turks and Caicos. In March 2011, he pleaded guilty in a federal court in Orlando, resulting in his 30-year prison term.
“I’m really shocked the Martinez family has escaped U.S. prosecution for a massive money-laundering exercise,” says Mark Knighton, the retired head of the Turks and Caicos financial crimes unit, who ran the island’s investigation of Olint. “We certainly had the evidence.”
On Jan. 23, in a surprise to the U.S. Department of Justice, Smith was released two years early from his Turks and Caicos prison cell. He spent that night with his wife, Tracy, and their four children, ages 5 to 13. It was the first time in four years the family had been together. “I am enjoying the moment right now,” he said in a telephone interview amid the excited screams of his kids. “I don’t know when they’re going to come and get me.”
Less than 24 hours later, Smith was taken back into custody at the request of the Justice Department. The U.S. will present its case for extradition at a hearing on Providenciales on June 5. It could be a long time before David Smith goes home again.
This story appears in the June 2015 issue of Bloomberg Markets.
Posted: January 17, 2016, 4:19 pm
Ever taken out cash from an ATM machine and gotten socked with a $3 fee (or worse)? You probably weren't thrilled about that.Nobody likes those fees. Except banks.America's three biggest banks -- JPMorgan Chase (JPM), Bank of America&nbs...
Posted: January 17, 2016, 4:19 pm