Great Depression Online Archive Issue:

The Biggest Financial Deception of the Decade

Great Depression Online
Long Beach, CA
January 08, 2010

Inside This Issue You Will Discover…

*** Floating On Water
*** The List of Crooks Goes On and On
*** The Biggest Financial Deception of the Decade
*** And More

Floating On Water

Hucksters and swindlers use to be so fun.  There was a merriment to their fiddles and frauds that was both amusing and endearing.  Royal imposters, medicinal quacksalvers, traveling carnies…just hearing their yarns was worth the price of their cons.

Financial fraudsters were a hoot too…

There was Charles Ponzi, of course, the prototypical swindler, who gained notoriety in 1920 when he hatched a ploy offering 50 percent return on investment in 45 days, or a 100 percent return in 90 days.

Unknown to investors, the returns were paid by the money of subsequent investors. 

After serving time in the pokie for his misconduct, Ponzi was released to face state charges.  He then jumped bail, fled to Florida, and set up a scam to sell Florida property.  When authorities caught on to him, Ponzi shaved his head, grew a mustache, and tried to flee the country as a crewman on a merchant ship.

~~~~~~Gold’s “Slingshot Effect”~~~~~~

Gold has always performed well in times of crisis.  During the Great Depression, gold and gold stocks were among the few assets to skyrocket in value.  What’s more, gold is an ideal hedge against inflation, due to its superior ability to hold its value.

But as good as gold is at building and preserving your wealth, an even smarter way to profit from the ongoing crisis is to exploit gold’s slingshot effect and maximize profits from the inevitable rise in gold.

Simply by using the power of leverage, you can increase gold’s gains by 4-1 or more.  All without having to touch risky options, gold futures, or junior mining companies.

Gold’s “Slingshot Effect”

~~~~~~~~~~~~~~~~~~~~~~~~~

He was caught and sent back to Massachusetts to serve out his prison term.  But Ponzi’s not all…

There was the salad oil guy…Tino De Angelis.  Remember him?  Boy was he slick.  He was so greased up he floated on water…literally. 

In the early 1960s, he hatched a scheme to sell nothing for something.  Its pure genius was its simplicity… 

First he convinced banks to issue loans based on his inventory of salad oil.  Then he loaded up giant tankers with water…and topped them off with salad oil.  The oil floated on top of the water so inspectors observed the tanks were indeed loaded with oil.

When the fraud was exposed, the futures market crashed and wiped out the loans, and American Express, Bank of America, and others, lost over $150 million…or about $1.1 billion in today’s dollars.

Shortly after getting out of jail in 1972, De Angelis was at it again.  This time he hatched a Ponzi scheme involving Midwest cattle.  Luckily, for American Express, this scam collapsed before it got off the ground.

The List of Crooks Goes On and On

How things have changes?  These days the fraudsters are with the big banks or in the beltway.  They’re all scoundrels and scalawags…bankers, CEOs, Senators, the whole lot. 

Former master of the universe personas off Wall Street have been marked down to junk grade status.  In fact, their fall from grace has dropped so far they’re now persona non grata at rotary clubs in Bergen County, New Jersey.

Dick Fuld, Daniel Mudd, James Cayne, Franklin Delano Raines, Alan Fishman, Ken Lewis, Ken Thompson, Kenneth Lay, Bernie Madoff, Angelo Mozilo, Richard Syron, Kerry Killinger…the list of crooks goes on and on.

In today’s guest essay, Jeff Clark, Editor of Casey’s Gold & Resources Report, will take you on an amusing review of the decades greatest rackets…including his vote for the decade’s most dastardly deception.

Enjoy,

M.N. Gordon
Great Depression Online

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The Biggest Financial Deception of the Decade

By Jeff Clark, Editor, Casey’s Gold & Resources Report

Enron?  Bear Stearns?  Bernie Madoff?  They’re all big stories about big losses and have hurt a lot of employees and investors.  But none come close to getting my vote for the decade’s most dastardly deception…

First came Enron, with $65.5 billion in assets, going belly-up and becoming the largest bankruptcy in U.S. history at that time.  Chairman Kenneth Lay said that Enron’s decision to file bankruptcy would “stabilize the company,” but over the next five years the company was completely liquidated.  The stock went from a high of $84.63 in December 2000 to a whopping 26¢ one year later.

And what had we been told by the media?  Fortune magazine dubbed Enron “America’s Most Innovative Company” for six consecutive years.  A well-intentioned friend wanted to give me a gift subscription to the magazine for Christmas; I choked on my cocktail and luckily he assumed my drink was too strong.  In the end, you can thank Enron for bringing us the Sarbanes-Oxley Act of 2002, a ghastly financial reporting regulation for which compliance is grossly expensive, and – stop the presses! – hasn’t prevented similar repeats.

Next came WorldCom filing for bankruptcy in 2002, their assets of $103.9 billion dwarfing Enron’s.  “We will use this time under reorganization to regain our financial health and focus, while operating with the highest integrity,” assured CEO John Sidgmore. Was his eggnog spiked?  Today, WorldCom stock certificates have been spotted as doilies under pancake house coffee mugs signifying it’s decaf.

~~~~~~Profit from the Crisis~~~~~~

Right now gold is in the midst of a long-term bull market.

A bull that started in 2001 – when gold hit bottom at $255 an ounce – driving the yellow metal up to today’s price of over $1,060.  That’s an increase of more than 315%.

Impressive?  You bet.

But this is nothing new.  Gold has always performed well in times of crisis.  During the Great Depression, gold and gold stocks were among the few assets to skyrocket in value.  What’s more, gold is an ideal hedge against inflation, due to its superior ability to hold its value.

Profit from the Crisis

~~~~~~~~~~~~~~~~~~~~~~~~~

Tyco, Adelphia, Peregrine Systems… it’s a crowded field around this time.  But their stories of fraud and greed and mismanagement get boring after awhile.  Just watch the closing credits from the movie Fun with Dick and Jane and you’ll see what I mean.

Bear Stearns set us all up for the Big Meltdown of 2008.  It was B.S. (no, I mean Bear Stearns) that pioneered the asset-backed securities markets, and we all know how that turned out.  Later we learned that as losses mounted in 2006 and 2007, the company was actually adding to its exposure of mortgage-backed assets, gearing itself up to 35:1.  With net equity of $11.1 billion supporting $395 billion in assets, B.S. carried more leverage than a streetwalker’s push-up bra.

And during it all, Bear Stearns was recognized as the “Most Admired” securities firm in a survey by Fortune magazine (there’s that Lower Manhattan tabloid darling again).  Frequent sightings of company executives on country club fairways assured the public that all was well.  And CEO Alan Schwartz told us there was “no liquidity crisis for the firm” and insisted he “had the numbers to back it up.”  His company was sold four days later to JPMorgan Chase at $10 per share, a 92% loss from its $133.20 high.  Perhaps his numbers were prepared by ex-Arthur Andersen employees.

Lehman Brothers, the 158-year-old investment bank, was next and still today holds the title as the largest bankruptcy in U.S. history.  L.B. succumbed to 2007’s Word of the Year, “subprime,” and its $600 billion in assets all went poof!  In just the first half of 2008, before the meltdown, Lehman’s stock slid 73%.

And what did CEO Dick Fuld tell us in April of that year?  “I will hurt the shorts, and that is my goal.”  He must have been referring to the attire of his tennis club buddies, because the ones who actually got hurt were numerous other banks, money market funds, institutions, hedge funds, REITs, brokers, private and public trusts, foundations, government agencies, foreign governments, employees, and investors.

Moving on to the largest U.S. government bailout recipient by far, AIG’s troubles spawned my favorite placard of the decade: seen outside their Manhattan offices stood a sign that simply read, “Jump!”  Maybe its creator heard what I did from AIG’s financial products head Joseph Cassano: “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions.”

He must have substituted his prescription eyewear with those giant New Year’s Eve glasses, because the government sunk $180 billion into the company and it still had to be split up and the assets sold to the highest bidder.  I’m sure that his non-flippant comment had nothing to do with him making CNN’s “Ten Most Wanted Culprits” list in 2008.

GM, with $91 billion in assets, filed for bankruptcy in the summer of 2009 and is now largely owned by the U.S. and Canadian governments (i.e., taxpayers).  The $19.4 billion in federal help wasn't enough to keep the nation's largest automaker out of bankruptcy.  But don’t despair: the government is pouring another $30 billion into GM to fund “reorganization operations.”

GM shares?  Bye-bye.  For 83 years GM had been a member of the prestigious 30 Dow Industrial stocks.  It managed to survive the Great Depression but not this decade’s Greater Depression.  Yet chairman Ed Whitacre had insisted, “I remain more convinced than ever that our company is on the right path and that we will continue to be a leader in offering the worldwide buying public the highest quality, highest value cars and trucks.”  I wonder what he thinks now that the stock is named “Motors Liquidation,” trades only on the pink sheets, and sells for about 50¢?

~~~~~~Why Gold, Why Now?~~~~~~

With gold’s dramatic rise in price, you may be wondering if you’re too late to get in on the profits.  Let me assure you that the answer is, “No.”

Outside of the investing community, how many people do you hear talking about gold?  How many of your friends and family own gold?  How many parties have you attended where gold is on everyone’s lips?

My guess is, virtually none.  And for investors like us, that’s a good thing.

Why Gold, Why Now?

~~~~~~~~~~~~~~~~~~~~~~~~~

Topping off our list is the infamous Bernie Made-off (er, Madoff), who scammed $65 billion over 20 years from unsuspecting institutions and wealthy investors.  But don’t be too upset, because the number is probably half that amount.  Hey, the alleged size of the losses comes from his own ledger book, and should we really trust his balance sheet?  Dubbed the largest Ponzi scheme ever, I beg to disagree, as you’re about to see…

By now you are probably wondering… what’s bigger than all these?  He’s covered the major frauds and scams of the past decade – what could possibly be left?

To quote my favorite sleuth, Hercule Poirot, “When all the facts are laid before me, the solution becomes inevitable.”

Here are a few clues…

Federal Reserve Chairman Ben Bernanke said on July 16, 2008, that Fannie Mae and Freddie Mac are “adequately capitalized” and “in no danger of failing.”  Then-Secretary Treasurer Henry Paulson declared on August 10, 2008, “We have no plans to insert money into either of those two institutions.”

*** Both Fannie and Freddie were nationalized 28 days later, on September 8, 2008.

Ben Bernanke claimed on February 28, 2008, “Among the largest banks, the capital ratios remain good and I don’t expect any serious problems of that sort among the large, internationally active banks…”  Henry Paulson added on July 20, 2008, that “It’s a safe banking system, a sound banking system.  Our regulators are on top of it.  This is a very manageable situation.”

*** Since the recession started in December, 2008, 144 banks have failed.

Paulson informed us on April 20, 2007, that “All the signs I look at show the housing market is at or near the bottom.”

*** The number of foreclosures skyrocketed shortly thereafter and will now any day surpass those during the Great Depression. 

Ben Bernanke announced on June 20, 2007, that “[The sub prime fallout] will not affect the economy overall.”

*** Less than one year later, the stock market crashed, losing 53% of its value, and is still down 25% despite one of the biggest bounces in history.

Those in charge of our country’s finances not only failed to see the crises developing and then bungled the handling of the recovery, they’ve deliberately misled us about what they’re doing to our currency.  In spite of emphatic promises, flowery speeches, pat-on-the-back assurances, and continual reassurances, here’s what they’ve actually done to the dollar:

- Since September 1, 2008, the monetary base has ballooned from $908 billion to $2.0 trillion.  The current monetary base is now equal to bailing out General Motors 23 times.

- Bailout funds in 2008 and 2009 total $8.1 trillion.  That’s almost 78 WorldComs.  It’s over 123 Enrons.

- U.S. debt has risen sharply, from $6.2 trillion in 2002 to $12.1 trillion today.  That’s over $39,000 per citizen.

- David Walker, the comptroller general of the Government Accountability Office from 1998-2008, warned that the U.S. is on the hook for $60 trillion in unfunded liabilities.  Independent analysts peg the figure at near twice that. Whatever the number, it is incomprehensibly large.  The only way we will meet these liabilities is to print the money and inflate them away.

We’re bailing out corporations that should fail, making financial promises we can’t keep, and adding layers of debt we can’t possibly repay.  And the real killer is, if we don’t have the cash, we just print it.  It is, by any reasonable account, the “blunder that will plunder” the next several generations.  It is changing America permanently, and the problems will persist long after you and I are laid to rest.

Bottom line: after all the bailout programs, housing initiatives, rescue efforts, stimulus schemes, bank takeovers, wars, unemployment benefit extensions, and numerous other promises, the biggest financial deception of the decade is what the U.S. government is doing to the dollar.  Nothing else even comes close.

This reckless activity has spooked our foreign creditors, weakened our global standing, diluted our currency, is punishing savers and retirees, and ultimately sets us up for a level of inflation this country has never seen before.

Yet, what is the guardian of our economy and money telling us now?

“Will the Federal Reserve's actions to combat the crisis lead to higher inflation down the road?  The answer is no; the Federal Reserve is committed to keeping inflation low and will be able to do so.  In the near term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here.” (Ben Bernanke, December 7, 2009).

This is pure rubbish.  If inflation could be controlled by just thinking stable inflation thoughts, then Ben should be able to grow a full head of hair by just thinking scalp follicle thoughts.  This is so ridiculous, it’s insulting.

Government actions make a mockery of their words; what they say and what they do are diametrically opposed.  It’s clear that inflation is not a question of if, but when.

Any level-headed individual has to conclude that there will be a steady – and likely accelerating – decline in the dollar’s purchasing power.  It’s inevitable.

The great masses don’t quite understand it yet, but they will.  There will be no escape from the cold, hard slap in the face citizens will receive when a high level of inflation arrives.  And when it does, it will make a mockery of any opposing viewpoint.

So the question before you is simple: Will you be a prepared survivor for what lies ahead, despite what our government leaders tell us, or will you be a complacent victim of the biggest financial deception of the decade?

For me, there’s only one solution.  Don’t kid yourself into thinking a man-made asset will protect your purchasing power.  This is the time to be overweight gold and silver.  I advise letting them serve their purpose for you.

Sincerely,

Jeff Clark, Editor
Casey’s Gold & Resources Report

P.S.  Learn the best ways to buy and hold gold and silver, and the stocks that will help you outpace the inflation that’s right around the corner.  Give Casey’s Gold and Resource Report a risk-free try and learn how to escape with your assets intact.  For $39 a year, it’s a no-brainer.

Click here for more.

 

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