The Death of Money (3 page)

MONEY AND GEOPOLITICS

PROPHESY

One of our biggest fears is that something happens today, and when we do the autopsy
we find that two weeks ago we had it, [but] we didn’t know because it was buried in
something else that wasn’t getting processed.

B. “Buzzy” Krongard

CIA executive director

September 1, 2001

The unconditional evidence supports the proposition that there was unusual trading
in the option markets leading up to September 11, which is consistent with the terrorists
or their associates having traded on advance knowledge of the impending attacks.

Allen M. Poteshman

University of Illinois at Urbana-Champaign

2006

Never believe anything until it has been officially denied.

Claud Cockburn

British journalist

■
Trading in Plain Sight

“No one trades alone.” An axiom of financial markets, this truism means that every
trade leaves transaction records there to be seen. If one knows where to look and
how to examine the history and data, much can be learned not only about quotidian
sales of stock by the obvious players, large and small, but about more troubling truths
and trends. The market
evidence surrounding 9/11—most of which is little understood by the public—is a case
in point.

The secure meeting rooms at the CIA’s Langley headquarters—windowless, quiet, and
cramped—are called “vaults” by those who use them. On September 26, 2003, John Mulheren
and I were seated side by side in a fourth-floor vault in the headquarters complex.
Mulheren was one of the most legendary stock traders in Wall Street history. I was
responsible for modeling terrorist trading for the CIA, part of a broad inquiry into
stock trading on advance knowledge of the 9/11 attacks.

I looked in his eyes and asked if he believed there was insider trading in American
Airlines stock immediately prior to 9/11. His answer was chilling: “
It was the most blatant case of insider trading I’ve ever seen.”

Mulheren started his stock trading career in the early 1970s and, at age twenty-five,
became one of the youngest managing directors ever appointed at Merrill Lynch. He
was found guilty of insider trading in 1990 as part of the trading scandals of the
1980s, but the verdict was overturned on appeal.
His conviction was based on testimony provided by Ivan Boesky, himself a notorious
insider trader. During the case, Mulheren had been apprehended by police at his Rumson,
New Jersey, estate as he set out with a loaded assault rifle in his car to kill Boesky
in broad daylight.

Mulheren was expert in options trading and the mathematical connections between the
prices of options and the prices of the underlying stocks on which the options were
written. He was also a seasoned trader in takeover stocks and knew that deal information
was often leaked in advance, an open invitation to insider trading. No one knew more
about the linkage between insider trading and telltale price signals than Mulheren.

When we met at Langley, Mulheren was CEO of Bear Wagner, one of seven New York Stock
Exchange specialist firms at the time. Recently, specialist firms have faded in importance,
but on 9/11 they were the most important link between buyers and sellers. Their job
was to make a market and stabilize prices. Specialists used options markets to lay
off the risk they took in their market making. They were a crucial link between New
York stock trading and Chicago options trading.

Mulheren’s firm was the designated market maker in American Airlines stock at the
time of the 9/11 attacks. When the planes hit the twin
towers, Mulheren saw the smoke and flames from his office near the World Trade Center
and understood immediately what had happened. While others speculated about a “small
plane, off-course,” Mulheren furiously sold S&P 500 futures. In the ninety minutes
between the time of the attack and the time the futures exchange closed, Mulheren
made $7 million shorting stocks. He later donated all the gains to charity.

Mulheren was an eyewitness: he watched both the unfolding of the 9/11 attack and the
insider trading that preceded it. His presence at Langley in 2003 was part of a CIA
project whose roots reached back to a time before the attack itself.

■
The Terror Trade

September 5, 2001, was the day Osama bin Laden learned that the attacks on New York
and Washington would take place on 9/11. The countdown to terror had begun. There
were four trading days left before the streets around the New York Stock Exchange
would be choked with death and debris. Terrorist traders with inside information on
the attack had only those few days to execute strategies to profit from the terror.
Insider trading on advance knowledge of the 9/11 plot was in full swing by September
6.

Bin Laden was financially sophisticated, having been raised in one of the wealthiest
families in Saudi Arabia. The other leaders of Al Qaeda, including the 9/11 hijackers,
were not drawn from the ranks of the ignorant and impoverished; they were doctors
and engineers. Many lived in developed countries such as Germany and the United States.
Al Qaeda was financially backed by wealthy Saudis who traded stocks on a regular basis.

Al Qaeda’s familiarity with the workings of the New York Stock Exchange is well known.
In an interview with a Pakistani journalist just weeks after the 9/11 attacks, Bin
Laden made the following comments, which show how closely he drew the connection between
terror and trading:

I say the events that happened on Tuesday 11th September on New York and Washington,
that is truly a great event in all measures. . . .
And if the fall of the towers . . . was an event that was huge, then consider the
events that followed it . . . let us talk about the economic claims which are still
continuing. . . .

The losses on the Wall Street Market reached 16%. They said that this number is a
record, which has never happened since the opening of the market more than 230 years
ago. . . . The gross amount that is traded in that market reaches 4 trillion dollars.
So if we multiply 16% with $4 trillion to find out the loss that affected the stocks,
it reaches $640 billion of losses from stocks, with Allah’s grace.

American Airlines and United Airlines, the operators of the four flights that were
hijacked on 9/11, are public companies whose stock is traded on the New York Stock
Exchange. In 2001 American Airlines traded with the ticker symbol AMR, and United
Airlines with the ticker UAL.

An investigator looking for evidence of insider trading usually starts with the options
markets, closely linked to the stock market. Decades of insider trading cases have
shown that options are the insider trader’s tool of choice. The reason is obvious:
options offer much greater leverage for the same amount of cash than regular stock
trading. What makes sense for Wall Street crooks also makes sense for terrorists.
When one is betting on a sure thing, leverage amplifies the expected profits, and
the terrorists were betting on a sure thing—the panic that would follow their attack.

While the operational details of the 9/11 terror attacks were known in advance to
only a small cadre of operatives, the coming of an attack on September 11, 2001, was
known to a larger circle. This group included immediate associates of the hijackers,
housemates, and financial backers,
as well as family and friends. Those who learned of the coming attacks from the terrorists
told others, and the information spread through a social network in much the same
way a video goes viral.

Advance knowledge of an attack communicated in social networks does not help intelligence
agencies unless the messages are intercepted. Interception presents challenges both
in directing collection resources at the right channels and in separating signals
from noise. But at least one channel was blinking red before 9/11, telling the world
that disastrous events involving airlines were imminent. That channel was the pinnacle
of the U.S. financial establishment—the New York Stock Exchange.

As the terror clock ticked away, market signals rolled in like a tsunami.
A normal ratio of bets that a stock will fall to bets it will rise is 1 to 1. On September
6 and 7, option bets that United Airlines stock would fall outnumbered bets it would
rise by 12 to 1. Exchanges were closed on September 8 and 9 for the weekend. The last
trading session before the attack was September 10, and that day option bets that
American Airlines stock would fall outnumbered bets it would rise by 6 to 1. On September
11, 2001, United Airlines and American Airlines flights struck the World Trade Center
and Pentagon. The first trading day after the attacks, United Airlines stock fell
43 percent and American Airlines stock fell 40 percent from where they had last closed.
Thousands of Americans were dead. The options traders had made millions.

One-sided trading, involving more bearish than bullish bets of the kind seen just
prior to 9/11, would not be unusual if there were negative news about the stocks.
But there was no news on airlines on those days. The stocks of other major airlines,
such as Southwest and US Airways, did not exhibit the massively bearish trading that
affected American and United.

All that appeared was a huge one-way bet on a decline in the stock prices of American
and United Airlines in the last four trading days before 9/11. Seasoned traders and
sophisticated computer programs recognize this pattern for what it is—insider trading
in advance of adverse news. Only the terrorists themselves and their social network
knew that the news would be the most deadly terrorist attack in U.S. history.

The trading records are not the only evidence of a terrorist connection to insider
trading in advance of the attacks. Yet notwithstanding such evidence, the official
9/11 Commission concluded:

Exhaustive investigations by the Securities and Exchange Commission, FBI, and other
agencies have uncovered no evidence that anyone with advance knowledge of the attacks
profited through securities transactions.

This language used in the 9/11 Commission Report is a lawyer’s dodge. Saying that
agencies uncovered no evidence does not mean there is no evidence, merely that they
failed to find it. The conclusion that no one
profited does not mean that transactions did not take place, merely that the profits
could not be ascertained. Perhaps the perpetrators failed to collect their winnings,
like a bank robber who drops a satchel of stolen cash in flight. The inside terrorist
traders may not have known the exchange would be closed for days after the attack,
making it impossible to settle trades and collect winnings.

Despite the official denial, proof of the terrorist trading connection is found through
a deeper dive into the world of forensics and the phenomenon of signal amplification.
The unusual options trading in advance of 9/11 has been closely studied by academics.
The literature, most of it published
after
the 9/11 Commission completed its work, is emphatically of the view that
the pre-9/11 options trading was based on inside information.

The leading academic study of terrorist insider trading connected to 9/11 was done
over four years, from 2002 to 2006, by Allen M. Poteshman, then at the University
of Illinois at Urbana-Champaign. His conclusions were published by the University
of Chicago in 2006.

These conclusions were based on strong statistical techniques. This is like using
DNA to prove a crime when there was no eyewitness. In murder cases, prosecutors compare
a defendant’s DNA to samples found at the crime scene. A DNA match might implicate
a defendant in error, but the chance is so slight, so exceedingly remote, that juries
routinely convict. Certain statistical correlations are so strong that the obvious
conclusion must be drawn despite a microscopic chance of error.

Academics like Poteshman take large sets of data and establish the normal behavior
of stocks, called the baseline. Researchers then compare actual trading in a target
period to the baseline to see if the target period represents normal or extreme activity.
Explanatory variables are tested to account for extreme activity.
These techniques have proved reliable in many investigatory and enforcement contexts.
During the dot-com bubble, for example, they were used to uncover widespread illegal
backdating of options by technology companies.

Poteshman’s data for the purposes of establishing a baseline included a daily record
of options trades on all stocks in the S&P Index from 1990 through September 20, 2001,
shortly after the 9/11 attacks. He focused on several relevant ratios before turning
to the one most likely to be used
by terrorists—the simple purchase of put options on AMR and UAL. A put option on a
stock is a bet that the stock’s price will fall.

He arranged the data in decimal brackets from 0.0 to 1.0, with 0.0 representing extremely
low activity in put options and 1.0 representing extremely high activity. He discovered
that in the four trading days prior to 9/11, the maximum daily value for either hijacked
airline was 0.99 and the maximum value over the entire four-day window was 0.96. In
the absence of any news that would explain such an extreme skew, the inescapable conclusion
is that this activity represents insider trading. Poteshman writes:

There is evidence of unusual option market activity in the days leading up to September
11 that is consistent with investors trading on advance knowledge of the attacks.

Another leading study, conducted by the Swiss Finance Institute, reached the same
conclusion. This study covered the period 1996 to 2009 and analyzed over 9.6 million
options trades in thirty-one selected companies, including American Airlines. With
respect to 9/11, the study concluded:

Companies like American Airlines, United Airlines, Boeing and to a lesser extent Delta
Air Lines and KLM seem to have been targets for informed trading activities in the
period leading up to the attacks. The number of new put options issued during that
period is statistically high and the total gains . . . realized by exercising these
options amount to more than $16 million. These findings support the evidence in Poteshman
(2006) who also documents unusual activities in the option market before the terrorist
attacks.