Interested in laundering money? Want to evade taxes? Don’t want to be on the radar when large sums are being moved around? Tired of the annoyances of draconian banking regulations cutting into your fun?
Use a hedge fund.
I had a moment of epiphany over the last week. It all crystallized in a discussion with a friend of mine. Here’s the revelation:
Anti-terrorist legislation, anti-mony-laundering regulations, “know your customer” rules, demonization of “tax havens” (ignoring that the US is the world’s largest for non-citizens) – none of them have any meaningful bearing in the new economy. Those are for sissies and rubes. For the masses. Not for those breathing rarified air.
Remember when Bank of NY got caught money laundering for the Russian mob? That was so old-fashioned. Almost embarrassing. And so hard to cover-up.
Why use banks when you can move your money around the globe, using hedge funds, free from prying eyes, and with whatever jurisdictional protections or freedoms suit your fancy?
Here’s how it works. Russian mobster A puts $100 million into 5 hedge funds, all in the BVI. Those 5 hedge funds then invest in whatever they feel like. Maybe they invest in call options, sold by 3 other hedge funds. Maybe those calls are very expensive, and effectively transfer that $100 million to the writer of the calls. The stocks those calls are written in are not particularly good companies, and have virtually no chance of being called away, thus that $100 million is now the property of those 3 other, related hedge funds, and the 5 hedge funds have “lost” the money.
And now the money is clean. To be invested however the new hedge funds see fit.
Or how about US-based terrorist funding conduit A, who wants to get his brethren in Saudi Arabia and Yemen a few hundred million to mount the next terrorist attacks against us?
Same mechanism. Sympathetic parties can invest in some hedge funds here, who then make disastrous investment decisions, a la purchasing calls in dog companies A-D – conveniently offered for sale by hedge funds located in Malaysia or Austria or Dubai, who then redeem some cash to their clients, who are conduits for the terrorist activity. The money is effectively transferred, and derivatives make it even easier to mask – they were just bad bets, and those happen every day. Maybe spice it up a little and become a market maker in the companies, too, or an options market maker. Whatever. It’s only limited by your imagination.
Or how about they get leverage on their laundering, and manipulate some prices up, to make the calls that much more expensive, and then some of the money is used to buy puts in other companies, who are targeted for massive naked short selling? Then you not only have a transference of money from A to B, but you can double or triple the money in the process.
There are a million variations. But the simple truth is that this has created a secondary banking system, where large sums can easily be moved and laundered, profits or losses can be seamlessly transferred wherever one wants, and it all occurs outside the banking system where the safeguards and regs are in place to stop this.
It is like Wall Street has set up a one-world banking system outside of the rules that govern the banking systems of the respective countries.
There are two banking systems now. The one where a guy with a few hundred grand has to report if he deposits over $3K in cash, and is audited should his return look even slightly suspicious. One where every dime of his income is tracked by a government on the lookout for tax cheats and miscreants. And then there is the other, where the rich, via criminal behavior, or honest wealth building, can move many millions with the stroke of a few keys, and nobody is the wiser.
Wall Street facilitates this, as it doesn’t have nearly the safeguards in place. Hedge funds open accounts, and nobody asks where the money comes from – it is from investors, dumbass. Don’t want the hundreds of millions? Fine, I’ll find a broker who does.
The light went off in my head this week, and I finally understood why governments don’t want to regulate these entities – this helps everyone with money and power move their funds around outside of the system that so restrictively controls the rank and file.
If hedge funds had been really active back in the late 80’s and early 90’s there would have been no need for something as clumsy as Iran Contra, where factions of our own intelligence community were selling arms to Iran in order to raise funding for the rebels we supported. No, instead, the transactions would have been seamless, with no trails left, and with a little naked short selling the money could have dwarfed what the sale of a few missiles brought in. That is so old school and clumsy. Iran invests in hedge fund A, who invests in puts sold by investor B, the Nicaraguan hedge fund. Bam. Money transferred upon receipt of goods.
Or they could have just agreed to target a vulnerable biotech firm or two, and naked short sold them from $15 to a few pennies, and pocketed all the proceeds for their “cause” – and no messy banking trail to follow. Even better, they could have picked a company with options trading, and gotten even more bang for their buck – sell calls and buy puts in that company, and then naked short it into the ground, creating huge wealth from the options, and still pocketing the proceeds from the naked short sales. Pretty soon the “rebels” are driving benzes and funding themselves – as are sympathetic governments, who have been let in on the secret. Want to fund a country off the radar? Same mechanism – their clandestine agencies fund some hedge funds, which then engage in the aforementioned money-making behavior while regulators turn a blind eye…and presto! Suddenly that country has been taught to fish, and is self-sufficient in its ability to fund itself.
Like I said, there are so many permutations. One only has to have the creativity to imagine…
And you wonder why everyone in a position of power is against any meaningful regulation of hedge funds?
Please. I mean really. Please. The same folks that brought you BCCI and the SEC crisis and the last 20 years of Wall Street malfeasance are making fortunes, and have solved the problems of oversight and restrictions on their behavior.
The only ones to lose are the populations of the countries restricted to the other banking system, and who invest in markets where the miscreants prey with impunity.
But nobody ever said life was fair, and someone has to pay into the system for them to get money out – at the end of the day, it’s a zero sum game. And if you don’t own the casino, where the cards are marked and the die loaded, then you lose.
Sorry.
Any questions?