The mother of all insider trades was pulled off in 1815, when London financier Nathan Rothschild led British investors to believe that the Duke of Wellington had lost to Napoleon at the Battle of Waterloo. In a matter of hours, British government bond prices plummeted. Rothschild, who had advance information, then swiftly bought up the entire market in government bonds, acquiring a dominant holding in England's debt for pennies on the pound. Over the course of the nineteenth century, N. M. Rothschild would become the biggest bank in the world, and the five brothers would come to control most of the foreign-loan business of Europe. "Let me issue and control a nation's money," Rothschild boasted in 1838, "and I care not who writes its laws."
In the United States a century later, John Pierpont Morgan again used rumor and innuendo to create a panic that would change the course of history. The panic of 1907 was triggered by rumors that two major banks were about to become insolvent. Later evidence pointed to the House of Morgan as the source of the rumors. The public, believing the rumors, proceeded to make them come true by staging a run on the banks. Morgan then nobly stepped in to avert the panic by importing $100 million in gold from his European sources. The public thus became convinced that the country needed a central banking system to stop future panics, overcoming strong congressional opposition to any bill allowing the nation's money to be issued by a private central bank controlled by Wall Street; and the Federal Reserve Act was passed in 1913. Morgan created the conditions for the Act's passage, but it was Paul Warburg who pulled it off. An immigrant from Germany, Warburg was a partner of Kuhn, Loeb, the Rothschilds' main American banking operation since the Civil War. Elisha Garrison, an agent of Brown Brothers bankers, wrote in his 1931 book Roosevelt, Wilson and the Federal Reserve Law that "Paul Warburg is the man who got the Federal Reserve Act together after the Aldrich Plan aroused such nationwide resentment and opposition. The mastermind of both plans was Baron Alfred Rothschild of London." Morgan, too, is now widely believed to have been Rothschild's agent in the United States.11
Robert Owens, a co-author of the Federal Reserve Act, later testified before Congress that the banking industry had conspired to create a series of financial panics in order to rouse the people to demand "reforms" that served the interests of the financiers. A century later, JPMorgan Chase & Co. (now one of the two largest banks in the United States) may have pulled this ruse off again, again changing the course of history. "Remember Friday March 14, 2008," wrote Martin Wolf in The Financial Times; "it was the day the dream of global free-market capitalism died."
The Rumors that Sank Bear Stearns
Mergers, buyouts and leveraged acquisitions have been the modus operandi of the Morgan empire ever since John Pierpont Morgan took over Carnegie's steel mills to form U.S. Steel in 1901. The elder Morgan is said to have hated competition, the hallmark of "free-market capitalism." He did not compete, he bought; and he bought with money created by his own bank, using the leveraged system perfected by the Rothschild bankers known as "fractional reserve" lending. On March 16, 2008, this long tradition of takeovers and acquisitions culminated in JPMorgan's buyout of rival investment bank Bear Stearns with a $55 billion loan from the Federal Reserve. Although called "federal," the U.S. central bank is privately owned by a consortium of banks, and it was set up to protect their interests.2 The secret weekend purchase of Bear Stearns with a Federal Reserve loan was precipitated by a run on Bear's stock allegedly triggered by rumors of its insolvency. An article in The Wall Street Journal on March 15, 2008 cast JPMorgan as Bear's "rescuer":
"The role of rescuer has long been part of J.P. Morgan's history. In what's known as the Panic of 1907, a semi-retired J. Pierpont Morgan helped stave off a national financial crisis when he helped to shore up a number of banks that had seen a run on their deposits."
That was one interpretation of events, but a later paragraph was probably closer to the facts:
"J.P. Morgan has been on the prowl for acquisitions. . . . Bear's assets could be too good, and too cheap, to turn down."3
The "rescuer" was not actually JPMorgan but was the Federal Reserve, the "bankers' bank" set up by J. Pierpont Morgan to backstop bank runs; and the party "rescued" was not Bear Stearns, which wound up being eaten alive. The Federal Reserve (or "Fed") lent $25 billion to Bear Stearns and another $30 billion to JPMorgan, a total of $55 billion that all found its way into JPMorgan's coffers. It was a very good deal for JPMorgan and a very bad deal for Bear's shareholders, who saw their stock drop from a high of $156 to a low of $2 a share. Thirty percent of the company's stock was held by the employees, and another big chunk was held by the pension funds of teachers and other public servants. The share price was later raised to $10 a share in response to shareholder outrage and threats of lawsuits, but it was still a very "hostile" takeover, one in which the shareholders had no vote.
The deal was also a very bad one for U.S. taxpayers, who are on the hook for the loan. Although the Fed is privately owned, the money it lends is taxpayer money, and it is the taxpayers who are taking the risk that the loan won't be repaid. The loan for the buyout was backed by Bear Stearns assets valued at $55 billion; and of this sum, $29 billion was non-recourse to JPMorgan, meaning that if the assets weren't worth their stated valuation, the Fed could not go after JPMorgan for the balance. The Fed could at best get its money back with interest; and at worst, it could lose between $25 billion and $40 billion.4 In other words, JPMorgan got the money ($55 billion) and the taxpayers got the risk (up to $40 billion), a ruse called the privatization of profit and socialization of risk. Why did the Fed not just make the $55 billion loan to Bear Stearns directly? The bank would have been saved, and the Fed and the taxpayers would have gotten a much better deal, since Bear Stearns could have been required to guaranty the full loan.
The Highly Suspicious Out-of-the-Money Puts
That was one of many questions raised by John Olagues, an authority on stock options, in a March 23 article boldly titled "Bear Stearns Buy-out . . . 100% Fraud." Olagues maintains that the Bear Stearns collapse was artificially created to allow JPMorgan to be paid $55 billion of taxpayer money to cover its own insolvency and acquire its rival Bear Stearns, while at the same time allowing insiders to take large "short" positions in Bear Stearns stock and collect massive profits. For evidence, Olagues points to a very suspicious series of events, which will be detailed here after some definitions for anyone not familiar with stock options:
A put is an option to sell a stock at an agreed-upon price, called the strike price or exercise price, at any time up to an agreed-upon date. The option is priced and bought that day based upon the current stock price, on the presumption that the stock will decline in value. If the stock's price falls below the strike price, the option is "in the money" and the trader has made a profit. Now here's the evidence:
On March 10, 2008, Bear Stearns stock dropped to $70 a share -- a recent low, but not the first time the stock had reached that level in 2008, having also traded there eight weeks earlier. On or before March 10, 2008, requests were made to the Options Exchanges to open a new April series of puts with exercise prices of 20 and 22.5 and a new March series with an exercise price of 25. The March series had only eight days left to expiration, meaning the stock would have to drop by an unlikely $45 a share in eight days for the put-buyers to score. It was a very risky bet, unless the traders knew something the market didn't; and they evidently thought they did, because after the series opened on March 11, 2008, purchases were made of massive volumes of puts controlling millions of shares.
On or before March 13, 2008, another request was made of the Options Exchanges to open additional March and April put series with very low exercise prices, although the March put options would have just five days of trading to expiration. Again the exchanges accommodated the requests and massive amounts of puts were bought. Olagues contends that there is only one plausible explanation for "anyone in his right mind to buy puts with five days of life remaining with strike prices far below the market price": the deal must have already been arranged by March 10 or before.
These facts were in sharp contrast to the story told by officials who testified at congressional hearings on April 4. All witnesses agreed that false rumors had undermined confidence in Bear Stearns, making the company crash despite adequate liquidity just days before. On March 10, 2008, Reuters was citing Bear Stearns sources saying there was no liquidity crisis and no truth to the speculation of liquidity problems. On March 11, the Chairman of the Securities and Exchange Commission himself expressed confidence in its "capital cushion." Even "mad" TV investment guru Jim Cramer was proclaiming that all was well and the viewers should hold on. On March 12, official assurances continued. Olagues writes: