fin flash
A financial article news letter by – FINANZA – The finance club of IMT – DCP, Ghaziabad
March 08, 2011 Volume I Edition: II
AN INITIATIVE OF ‘FINANZA’
Financial Terrorism
Suspected in ’08
Economic Crash
Source: The Washington Times
Dated: March 01, 2011
Evidence outlined in a Pentagon contractor
report suggests that financial subversion carried
out by unknown parties, such as terrorists or
hostile nations, contributed to the 2008
economic crash by covertly using vulnerabilities
in the U.S. financial system.
The unclassified 2009 report "Economic
Warfare: Risks and Responses" by financial
analyst Kevin D. Freeman, a copy of which was
obtained by The Washington Times, states that
"a three-phased attack was planned and is in the
process against the United States economy."
While economic analysts and a final report from
the federal government's Financial Crisis Inquiry
Commission blame the crash on such economic
factors as high-risk mortgage lending practices
and poor federal regulation and supervision, the
Pentagon contractor adds a new element:
"outside forces," a factor the commission did not
examine.
"There is sufficient justification to question
whether outside forces triggered, capitalized
upon or magnified the economic difficulties of
2008," the report says, explaining that those
domestic economic factors would have caused a
"normal downturn" but not the "near collapse" of
the global economic system that took place.
Suspects include financial enemies in Middle
Eastern states, Islamic terrorists, hostile
members of the Chinese military, or government
and organized crime groups in Russia,
Venezuela or Iran. Chinese military officials
publicly have suggested using economic warfare
against the U.S.
In an interview with The Times, Mr. Freeman
said his report provided enough theoretical
evidence for an economic warfare attack that
further forensic study was warranted.
"The new battle space is the economy," he said.
"We spend hundreds of billions of dollars on
weapons systems each year. But a relatively
small amount of money focused against our
financial markets through leveraged derivatives
or cyber efforts can result in trillions of dollars in
losses. And, the perpetrators can remain
undiscovered.
"This is the equivalent of box cutters on an
airplane," Mr. Freeman said.
Paul Bracken, a Yale University professor who
has studied economic warfare, said he saw "no
convincing evidence that 'outside forces'
colluded to bring about the 2008 crisis."
"There were outside players in the market" for
unregulated credit default swaps, Mr. Bracken
said in an e-mail. "Foreign banks and hedge
funds play the shorts all the time too. But
suggestions of an organized targeted attack for
strategic reasons don't seem to me to be
plausible."
Regardless of the report's findings, U.S. officials
and outside analysts said the Pentagon, the
Treasury Department and U.S. intelligence
agencies are not aggressively studying the
threats to the United States posed by economic
warfare and financial terrorism.
"Nobody wants to go there," one official said.
A copy of the report also was provided to the
recently concluded Financial Crisis Inquiry
Commission, but the commission also declined
to address the possibility of economic warfare in
its final report.
Officials, who spoke on the condition of
anonymity, said senior Pentagon policymakers,
including Michael Vickers, an assistant defense
secretary in charge of special operations,
blocked further study, saying the Pentagon was
not the appropriate agency to assess economic
warfare and financial terrorism risks.
Mr. Vickers declined to be interviewed but,
through a spokesman, said he did not say
economic warfare was not an area for the
Pentagon to study, and that he did not block
further study.
Mr. Vickers is awaiting Senate confirmation on
his promotion to be undersecretary of defense
for intelligence.
Despite his skepticism of the report, Mr. Bracken
agreed that financial warfare needs to be
studied, and he noted that the U.S. government
is only starting to address the issue.
"We are in an era like the 1950s where
technological innovation is transforming the tools
of coercion and war," he said. "We tend not to
see this, and look at information warfare,
financial warfare, precision strike, [weapons of
mass destruction], etc. as separate silos. It's
their parallel co-evolution that leads to
interesting options, like counter-elite targeting.
And no one is really looking at this in an overall
'systems' way. Diplomacy is way behind here."
Mr. Freeman wrote the report for the Pentagon's
Irregular Warfare Support Program, part of the
Combating Terrorism Technical Support Office,
which examines unconventional warfare
scenarios.
"The preponderance of evidence that cannot be
easily dismissed demands a thorough and
immediate study be commenced," the report
says. "Ignoring the likelihood of this very real
threat ensures a catastrophic event."
The report concluded that the evidence of an
attack is strong enough that "financial terrorism
may have cost the global economy as much as
$50 trillion."
Because of secrecy surrounding global banking
and finance, finding the exact identities of the
attackers will be difficult.
But U.S. opponents in Russia who could wage
economic warfare include elements of the
former KGB intelligence and political police who
regard the economy as a "logical extension of
the Cold War," the report says.
Asked by The Times who he thought to be the
most likely behind the financial attacks, Mr.
Freeman said: "Unfortunately, the two major
strategic threats, radical jihadists and the
Chinese, are among the best positioned in the
economic battle space."
Also, the report lists as suspects advocates of
Islamic law, who have publicly called for
opposition to capitalism as a way to promote
what they regard as the superiority of Islam.
Further Pentagon Low Intensity Conflict office
research into possible economic warfare or
financial terrorism being behind the economic
collapse by the Pentagon's Special Operations
and was blocked, Mr. Freeman said.
The Pentagon report states that the evidence of
financial subversion revealed that the first two
phases of an attack on the U.S. economy took
place from 2007 to 2009 and "based on recent
global market activity, it appears that the
predicted Phase III may be underway right now."
The report states that federal authorities must
further investigate two significant events in the
months leading up to the financial crisis.
The first phase of the economic attack, the
report said, was the escalation of oil prices by
speculators from 2007 to mid-2008 that
coincided with the housing finance crisis.
In the second phase, the stock market collapsed
by what the report called a "bear raid" from
unidentified sources on Bear Stearns, Lehman
Brothers and other Wall Street firms.
"This produced a complete collapse in credit
availability and almost started a global
depression," Mr. Freeman said.
 The third phase is what Mr. Freeman states in
the report was the main source of the economic
system's vulnerability. "We have taken on
massive public debt as the government was the
only party who could access capital markets in
late 2008 and early 2009," he said, placing the
U.S. dollar's global reserve currency status at
grave risk.
"This is the 'end game' if the goal is to destroy
America," Mr. Freeman said, noting that in his
view China's military "has been advocating the
potential for an economic attack on the U.S. for
12 years or longer as evidenced by the
publication of the book Unrestricted Warfare in
1999."
Additional evidence provided by Mr. Freeman
includes the statement in 2008 by Treasury
Secretary Henry M. Paulson Jr. that the
Russians had approached the Chinese with a
plan to dump its holdings of bonds by the
federally backed mortgage companies Fannie
Mae and Freddie Mac.
"The reality of the situation today is that foreign-
based hedge funds perpetrating bear raid
strategies could do so virtually unmonitored and
unregulated on behalf of enemies of the United
States," the report says.
"Only recently have defense and intelligence
agencies begun to consider this very real
possibility of what amounts to financial terrorism
and-or economic warfare."
As for Chinese involvement in economic
sabotage, the decline in the world economy may
have hurt Beijing through a decline in purchases
of Chinese goods.
Treasury spokeswoman Marti Adams had no
immediate comment on the report but said her
department's views on the causes of the
economic crash were well known.

Among the financial instruments that may have

been used in the economic warfare scenario are
credit default swaps, unregulated and
untraceable contracts by which a buyer pays the
seller a fee and in exchange is paid off in a bond
or a loan. The report said credit default swaps
are "ideal bear-raid tools" and "have the power
to determine the financial viability of companies."

Another economic warfare tool that was linked in

the report to the 2008 crash is what is called
"naked short-selling" of stock, defined as short-
selling financial shares without borrowing them.

The report said that 30 percent to 70 percent of

the decline in stock share values for two
companies that were attacked, Bear Stearns
and Lehman Brothers, were results of failed
trades from naked short-selling.

The collapse in September 2008 of Lehman

Brothers, the fourth-largest U.S. investment
bank, was the most significant event in the
crash, causing an immediate credit freeze and
stock market crash, the report says.

In a section of who was behind the collapse, the

report says determining the actors is difficult
because of banking and financial trading
secrecy.

We would love to hear back from you please mail us your comments or ideas at: finanza.imt@gmail.com
fin flash is an initiative of ‘Finanza’ the finance club of IMT, Ghaziabad (DCP).
This article was originally printed in ‘The Washington Post’ dated March 01, 2011.