By Gary Weiss
Posted Thursday, November 12, 2009 - 5:42pm
Once there was a simpler time, when pretty much everything that happened in the financial world had a straightforward explanation.
Take the crash of Oct. 19, 1987. In one day, the stock market lost more than one-fifth of its value. Back then there was considerable speculation about what caused the market to decline as much and as fast as it did. Something that most people never heard of (before or since) called “program trading” was widely blamed, and curbs were put in place. But very soon the nation moved on, the market rebounded, and the issue faded. Discussion of the causes of the crash was confined to presidential commissions and academics.
Today, of course, the market crash of 1987 seems like a happy interlude in comparison with the recent nightmare. With greater fear—reminiscent almost of the Red Scare of the 1950s—we’re seeing a rash of conspiracy theories.
It’s not surprising, really. In his 1963 essay “The Paranoid Style in American Politicians,” Richard Hofstadter marveled at the extent to which paranoia had become accepted part of the political dialogue. So it seems natural that paranoia has crept into the dialogue about the financial system as well.
As in all fields of conspiracy theorizing, there are two broad species of Wall Street conspiracy theories: the alternate history and the hidden factors.
Alternate history: One must not accept what they want you to believe. It’s far too easy to accept what they want you to believe about Sept. 11/the Holocaust/the Kennedy assassination. The truth that they don’t want you to believe is controlled demolition/it didn’t happen/Oswald was a patsy.
Hidden factors: It’s really happening and it’s all being hushed up. Area 51/the Trilateral Commission/a Masonic conspiracy.
But it’s not cut-and-dried. Maybe its agents didn’t kill Kennedy, but outlandish-sounding stories about the CIA turned out to be true. Time—sometimes a long time—either demolishes or substantiates conspiracy theories.
So here’s a field guide to the five most prevalent Wall Street conspiracy theories, with each one graded on scope, durability, crowd appeal, and plausibility and each graded on a sliding scale from 1 to 5, with 1 being “fugetaboutit” and 5 being “damn right.”
The Plunge Protection Team Manipulates the Markets
This is a classic conspiracy theory because it is grounded in fact. Yes, there really is a Plunge Protection Team, though it doesn’t go by that name. As revealed in a much-quoted Washington Post article from February 1997, the president’s Working Group on Financial Markets is poised to intervene in the event of a market calamity. “Plunge Protection Team” was coined by the Post, and it stuck. The article spawned a spasm of conspiracy theories that grind on to the current day, holding that the government actually does secretly intervene in the markets, buying equity index futures or, as Ron Paul recently asserted, has sought to depress the price of gold. But most of the braying about the PPT has been based on snippets of comments by public officials, and the actual evidence has been pretty much absent.
Category: Hidden factor
Scope: 4
Durability: 4
Crowd appeal: 3
Plausibility: 1
Wall Street Screws Consumers at the Gas Pumps
Wall Street speculation that drives up prices rarely gets the public too exercised—if the prices belong to stocks they’ve bought. But speculation that drives up the price of gasoline, heating oil, broiler chickens, and other commodities has consumers ready to march down from Trinity Church carrying pitchforks. So it was with the oil price spike of 2008. Surely there was a hidden hand there, no? After all, how was it that oil prices suddenly climbed? Didn’t make sense. Had to be nasty people on Wall Street doing that. Well, guess what? That’s exactly what happened. The Commodity Futures Trading Commission found that speculators did drive up the price of oil. So here’s a clear-cut example of how traders sitting behind terminals actually did screw ordinary people on the proverbial Main Street. That wasn’t their intent, but that’s what they did.
Category: Hidden factor
Scope: 5
Durability: 3
Crowd appeal: 5
Plausibility: 5
Goldman Sachs as Giant Vampire Squid
Rolling Stone writer Matt Taibbi seemed to touch a raw nerve in the yammering classes with his July 2009 article on the breadth of Goldman Sachs’ influence in Washington, on Wall Street, and everywhere. Goldman Sachs, as described by Taibbi, was a “giant vampire squid wrapped around the face of humanity.” Not the most precise metaphor (vampire squids are tiny deep-sea creatures that rarely encounter human faces), but the general thrust of his piece was correct. Goldman does have a way of coming out on top in every bad situation. Taibbi didn’t mention it, but Goldman was instrumental in ousting New York Stock Exchange CEO Richard Grasso when he proved to be an embarrassment. The weakness of his case against Goldman is that it relies on overstatement, such as the claim that Goldman “engineered every major market manipulation since the Great Depression.” But his essential point is right: Goldman did have a key role in the mortgage-derivatives fiasco, and its tentacles have spread through government for eons. It’s a classic case of overconcentration of power. And if you don’t believe me, just ask Adam Storch, 29 years old, the ex-Goldman executive who just became chief operating officer of the Securities and Exchange Commission enforcement division. I’d have given this conspiracy theory a “3” on the plausibility scale, but young Adam’s arrival at the SEC warrants another notch. Maybe vampire squids really do rise to the surface?
Category: Alternate history
Scope: 5
Durability: 3
Crowd Appeal: 5
Plausibility: 4
Tim Geithner Is in the Pocket of the Big Bankers
I debated whether to even include this in the list of conspiracy theories, because the evidence for it is so overwhelming. There’s no question that Tim Geithner likes to talk to people who run major financial institutions, and this was long before e-mails were released showing that as treasury secretary his telephone buddies included all the major CEOs of the big banks. That was the case as well when Geithner was president of the New York Fed. No secret about it. The bankers freely admitted that they chatted it up with Geithner. One can argue that there’s nothing wrong with this, that it’s not at all surprising for a financial neophyte to lean on people at, for instance, the aforementioned Goldman Sachs—particularly when it employs one of Geithner’s predecessors, his confidante E. Gerald Corrigan. The price of getting all this terrific expertise is that it makes you seem beholden to the people from whom you’re getting all this terrific expertise, and so it is with Geithner. While it isn’t kind to say that Geithner is in the pocket of Wall Street, there’s a bit too much lint flying around to ignore.
Category: Hidden factors
Scope: 2
Durability: 5
Crowd Appeal: 3
Plausibility: 5
Naked Short-Selling Killed Bear Stearns and Lehman Bros.
The accepted history of the death of Bear Stearns and Lehman Bros. is that the two were victims of their own doing; overreaching; incompetence; and sheer, squalid leverage-fueled greed, and that their companies, and stocks, collapsed as a result. You can believe that the CEOs of the two banks were responsible, or you can believe their excuse, which is remarkably similar. Alan Schwartz of Bear Stearns and Dick Fuld of Lehman Bros. both blamed speculators, rumormongers, and naked short-sellers for torpedoing their companies, in their respective appearances before congressional committees. Their own actions, they say, were flawless. Naked shorters, on the other hand—these are people who short-sell stocks but don’t borrow the shares—are said to have piled on as Bear and the Lehman were teetering and ground their stock prices into dust. Conspiracy theorists agree and are saying that the two firms were "destroyed" by naked shorting. One advocate of this position is the aforementioned Matt Taibbi, in a Rolling Stone article titled "Naked Swindle." Taibbi argued that Bear Stearns was “eaten by predators” and that “virtually the same scenario repeated itself in the case of Lehman Brothers." Both, he said, were "vaporized in an obvious case of market manipulation.” I.e., naked shorting.
Christopher Cox, chairman of the SEC, didn’t help this alternate history of the financial crisis when he said in July 2008 that there was no “unbridled naked short selling of financial issues.” It was completely debunked in a little-noticed academic study, conducted in May 2009 at the University of Oklahoma (PDF), which examined the same trading data cited by the conspiracy theorists. It found that there was "no evidence that stock price declines were caused by naked shorting." Any naked shorting, they found, took place after the two companies' stocks crashed.
It’s been more than a year since the two firms bit the dust, and so far there hasn’t been a prosecution of a single supposed Bear or Lehman bear raider. So you can believe that Schwartz and Fuld aren’t responsible for the collapse of their shares and that the SEC is deliberately refusing to cover itself in glory by nabbing the miscreants; or you can believe that nobody has been nailed for naked shorting their stocks into oblivion because there’s no one to nail.
Category: Alternate history
Scope: 4
Durability: 5
Crowd Appeal: 4
Plausibility: 1
Plausibility: 1
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