Tantamount to financial terrorism

Neil Barnett

26 April 2008

Neil Barnett says hedge funds should be forced to reveal their trading secrets, to deter them from the kind of market manipulation that has recently hit Icelandic banks

‘Now Icelandic CDS spreads are back down to around 800 basis points, but that’s still too high: in the summer of 2007 they were at 30 basis points. So what the speculators do is short the currency and equities and talk up CDS rates. It’s a triple whammy.’

The point is that the triple whammy is only dubious if market manipulation can be proven. It is interesting, then, to note the actions of one fund (not one of those present on the January trip to Reykjavik) around the end of March. The Spectator has learned that a partner of the fund telephoned at least two individuals with market influence and helpfully informed them that Icelandic banks were about to tank. He suggested that the famous Landsbanki IceSave and Kaupthing Edge internet savings accounts, currently beloved of British savers, were vulnerable to a run if Northern Rock-esque trouble were revealed — as, he suggested, inevitably it would be. Coming at a time when bank shares and the currency were already in freefall and CDS rates were going through the roof, this was calculated to turn a reverse into a rout.

A source in the British FSA confirms that it has received several reports of calls by this fund, but that the FSA has yet to launch an investigation. The ultra-litigious habits of the funds prevent naming the perpetrator at this point. But there are other instances of packs of funds attacking institutions through shorting and false rumour, which at any time would be criminal. In the present credit crunch, when the financial system is wobbling, it is tantamount to financial terrorism.

The most notorious case is the collapse of Bear Stearns in March. According to a banker with direct knowledge of the matter, who insists on anonymity, ‘Bear Stearns was prime broker for several hedge funds. A number of these funds started shorting Bear stock, and at the same time creating uncertainty over its liquidity. At the same time they also withdrew their business from Bear’s brokerage desk. They created a run on the bank using black propaganda and abusing their client status.’

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Chris De Vere

May 2nd, 2008 10:37pm Report this comment

Neil Barnett describes the behaviour of Hedge funds in shorting Iceland's currency and banking stocks as "financial terrorism". In doing so, he is missing the real culprits.

Bank deposits were originally treated as deposits for safekeeping and to be one hundred percent available, just as if goods were being stored in a warehouse. In other words, the funds on deposit could not be lent out to others in a process of credit expansion. Laws going back to Greek and Roman times have upheld this.

However, laws in more recent times have broken this principle by obscuring the difference between deposits for safekeeping and loans, legalizing fractional reserve banking and credit expansion. The great beneficiaries of this have been the banks themselves which have been able to greatly increase their profitability and governments which have been amongst the first and biggest beneficiaries of that credit expansion. Indeed, fractional reserve banking can only exist as partnership between the banks and governments, the governments having a monopoly on the issue of currency and a central bank to bail the banks out as a lender of last resort.

The Hedge Funds are therefore only pointing out what is essentially true: that in a fractional reserve banking system, the banks are technically insolvent; and the ability to trade in this way was only made possible by the legalizing of fraudulent activity.

I draw one’s attention to Jesus Huerta de Soto’s book, “Money, Bank Credit and Economic Cycles”.

David Jones

May 17th, 2008 5:34pm Report this comment

Chris De Vere makes a very noble post, but misses the point entirely, that the reason people deposit their money with banks in modern times is not only for safe keeping but to ensure a rate of return.

A bank that is required to keep funds '100% available' cannot produce a rate of return much higher than that of the depositor that chooses to store his banknotes under the bed.

Indeed a depositor who has done his homework, would weigh up in advance the level of risk/return that is acceptable before he chooses the institution that he places his funds with.

It is a brave cause to campaign against the evils of fractional banking, but much like the man spending his life in the street wearing the 'end of the world is nigh' sandwich board, the rest of the world is going to carry on around you regardless.

As for the hedge funds, they have been betting against Iceland in one way or another for the past decade... and they are still waiting for the collapse.

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