The Death of Money (7 page)

Another force multiplier is to begin the attack on a day when markets are already
crashing for unrelated reasons. Attackers could wait for a day when major stock indexes
are already down 2 percent, then launch the attack in an effort to push markets down
20 percent or more. This might produce a crash comparable to the great two-day crash
of 1929, which marked the beginning of the Great Depression.

Financial attackers can also utilize psychological operations, psyops, to increase
the attack’s effectiveness. This involves issuing false news stories and starting
rumors. Stories that a Fed chairman has been kidnapped or that a prominent financier
has suffered a heart attack would be effective. Stories that a top-tier bank has closed
its doors or that a hedge fund manager has committed suicide would suffice. These
would
be followed by stories that major exchanges are having “technical difficulties” and
sell orders are not being processed, leaving customers with massive losses. For verisimilitude,
stories would be crafted to mimic events that have actually happened in recent years.
Mainstream media would echo the stories, and the panic-inducing scenarios would be
widespread.

The New York Stock Exchange and the SEC claim they have safeguards designed to prevent
this kind of runaway trading. But those safeguards are designed to slow down rational
traders who are trying to make money and may be temporarily irrational. They involve
time-outs for the markets to allow traders to comprehend the situation and begin to
see bargains they might buy. They also involve margin calls designed to cover mark-to-market
losses and give the brokers a cushion against customers who default.

Those mitigation techniques do not stop the financial warrior, because he is not looking
for bargains or profits. The attacker can use the time-out to pile on additional sell
orders in a second wave of attacks. Also, these safety techniques rely heavily on
actual performance by the affected parties. When a margin call is made, it applies
the brakes to a legitimate trader due to the need to provide cash. But the malicious
trader would ignore the margin call and continue trading. For the malicious trader,
there is no day of reckoning. The fact that the enemy might be discovered later is
also no deterrent. The United States knew the Japanese bombed Pearl Harbor
after
the attack, but it didn’t see the attack coming until its battleships were sunk or
in flames.

A clearing broker could close out the malicious account to prevent more trading, but
that moves the open positions from the hedge funds to the brokers. In such circumstances,
many brokers would fail, and the cascade of failure would ripple through the financial
system and render the clearinghouses insolvent. The entire hierarchy of exchanges,
clearinghouses, brokers, and customers could be pushed to the brink of collapse.

Sleeper hedge funds can serve another insidious purpose, acting as intelligence-gathering
operations years in advance of an attack. Intelligence analysts today need more than
state secrets. Economic intelligence—including plans for natural resource projects,
energy discoveries, pipeline routes, and other initiatives—is just as valuable. This
information can
impact commodity markets, financial stability, economic growth, and the allocation
of resources by both the private and the government sectors. Such intelligence is
not always known to government officials, but is known to CEOs, engineers, and developers
throughout the private sector.

Once a covert hedge fund acquires a material position in a target company, it can
arrange to meet that company’s management. Access to management is especially easy
at small to medium-size companies that receive less attention from brokerage research
departments. Companies like this are often on the cutting edge of new designs in satellites,
3-D applications, and digital imaging. Access is the key. Savvy investors pick up
winks and nods and interpret hints to infer the timing and nature of the latest developments.
This can continue for years as the covert hedge fund patiently builds trust, churns
the account, gathers information, and spots vulnerabilities. Then, like a scorpion,
the fund stings, on orders from its sovereign masters.

Skeptics claim that an intelligence or military covert operation in hedge fund form
would be easy to detect because of detailed anti-money-laundering and know-your-customer
rules, strictly enforced by the brokers. This objection does not withstand scrutiny.
The necessary techniques for operating with cover include front companies, so-called
cutouts, secret agents, cover stories, and entities layered on top of each other so
that the unwitting points of contact cannot see the controlling parties. A covert
hedge fund structure involves layers of legal entities in tax-haven countries offering
the enemy sponsor a deep cover. Professional assistance is needed from corrupt lawyers
or bankers who retain innocent professionals to handle detailed work such as fund
administration. Directors are recruited from the advisory companies in offshore jurisdictions
that offer administration services to investors. Having innocent parties in the food
chain throws counterintelligence agents off the scent.

The covert fund manager would operate in well-appointed quarters in a cosmopolitan
center such as Zurich or London. The enemy managers would be highly educated professionals
groomed years before by foreign intelligence agencies to perform such tasks, with
business degrees from Harvard or Stanford. They would receive experience in large
bank training programs at places like Goldman Sachs and HSBC, forming a cadre of sleeper
finance professionals who are then given a covert assignment to manage the enemy funds.

Counterintelligence agents might happen upon such sleepers; the interception of targeted
communications may reveal something of their doings. But if their operation is structured
wisely by the enemy, such hedge fund plotters are almost undetectable by outsiders
unless insiders betray them. Then there’s the bigger issue: Is the U.S. national security
community on the lookout at all?

■
The World in Financial War

If all this sounds far-fetched, consider that the Chinese—and others—are already perpetrating
even subtler forms of financial attack.

In January 2011
The New York Times
reported that
China had been a net seller of U.S. Treasury securities in 2010 after years of being
a net buyer. The
Times
report found this selling strange because China was still accumulating huge dollar
reserves from its trade surpluses and was still buying dollars to manipulate the value
of its currency. The implication was that China must still be a large buyer of Treasuries,
even though official data showed otherwise. The
Times
noted that in 2010 Britain had emerged as the world’s largest purchaser of Treasury
securities, and it inferred that China had “shifted purchases to accounts managed
by British money managers.” In effect, China was using London bankers as a front operation
to continue buying U.S. Treasury notes while Beijing officially reported that it was
selling.

Another technique China uses to disguise its market intelligence operations was reported
on May 20, 2007, in
The New York Times
when
Andrew Ross Sorkin disclosed that the
China Investment Corporation (CIC), another sovereign wealth fund, had agreed to purchase
$3 billion of stock in Blackstone Group, the powerful and secretive U.S.-based private
equity firm.

Blackstone Group was cofounded by former Nixon administration senior official Peter
G. Peterson, later chairman of both the Council on Foreign Relations and the Federal
Reserve Bank of New York. The other Blackstone cofounder, Stephen A. Schwarzman, is
a multibillionaire who became
notorious for his sixtieth birthday party held at the New York
Park Avenue Armory on February 13, 2007, just a few months before Blackstone’s sale.
That party included a thirty-minute performance by Rod Stewart, for which the singer
was reportedly paid $1 million. China was now buying its own front-row seat at the
Blackstone party, gaining access to top management and the ability to coinvest in
pending deals.

In June 2007, shortly before global capital markets began the collapse that culminated
in the Panic of 2008, Schwarzman described his deal-making style: “
I want war, not a series of skirmishes. . . . I always think about what will kill
off the other bidder.” He was referring to conventional finance; real war was the
furthest thing from his mind. Yet he was already a pawn in a financial war greater
in scope than his blinkered perspective allowed him to see. Self-styled global citizens
like Schwarzman, who treat New York as a pit stop in their travels from Davos to Dalian,
may think real war is a thing of the past, even obsolete. Similar views were advanced
in the late 1920s, even as events were moving toward the greatest war in history.

Analysts praised the fact that the CIC-Blackstone deal showed that China was willing
“
to put its vast reserves to work outside of China.” But this emphasis on the outbound
money flow ignores the inbound flow of information. It is naïve not to consider that
information on America’s most powerful deal machine’s inner workings is being channeled
to the political bureaus of the Communist Party of China. The Chinese investment due
diligence teams get a look at confidential deal target information, even on deals
that do not ultimately get done. The $3 billion sale price may seem like a lot of
money to Schwarzman, but it is only one-tenth of one percent of China’s reserves,
the equivalent of dropping a dime when you have a hundred-dollar bill. China’s penetration
of Schwarzman and Blackstone is a significant step in its advance toward East Asian
hegemony and a possible confrontation with the United States. Of course, information
channels are a two-way street, and firms such as Blackstone do assist the U.S. intelligence
community with insights on Chinese capabilities and intentions.

The United States is not the only potential Chinese financial warfare target. In September
2012 a senior Chinese official, writing in the Communist
China Daily,
suggested mounting an attack on the Japanese bond market in retaliation for Japanese
provocations involving disputed island territories in the East China Sea. On March
10, 2013,
China hacked the
Reserve Bank of Australia in an effort to obtain intelligence on delicate G20 discussions.

China’s actions in the bond and private equity markets are part of its long-term effort
to operate in stealth, infiltrate critical nodes, and acquire valuable corporate information
in the process. These financial efforts are proceeding side by side with malicious
efforts in cyberspace and attacks on systems that control critical infrastructure,
launched by China’s notorious military espionage Unit 61398.
These combined efforts will prove useful to China in future confrontations with the
United States.

*  *  *

The United States is not supine when it comes to cyberwarfare; in fact, U.S. cybercapabilities
probably exceed those of the Chinese. Journalist Matthew Aid reported in 2013 on the
most sensitive U.S. cyberoperation of all, inside the National Security Agency:

A highly secretive unit of the National Security Agency (NSA) . . . called the Office
of Tailored Access Operations, or TAO, has successfully penetrated Chinese computer
and telecommunications systems for almost 15 years, generating some of the best and
most reliable intelligence information about what is going on inside the People’s
Republic of China. . . .

TAO . . . requires a special security clearance to gain access to the unit’s work
spaces inside the NSA operations complex. The door leading to its ultramodern operations
center is protected by armed guards, an imposing steel door that can only be entered
by entering the correct six-digit code into a keypad, and a retinal scanner to ensure
that only those individuals specially cleared for access get through the door. . . .

TAO’s mission is simple. It collects intelligence information on foreign targets by
surreptitiously hacking into their computers and telecommunications systems, cracking
passwords, compromising the computer security systems protecting the targeted computer,
stealing the data stored on computer hard drives, and then copying all the messages
and data traffic passing within the targeted email and text-messaging systems.

Spying operations such as TAO are far more sophisticated than the relatively simple
sweeps of e-mail and telephone message traffic revealed by Edward Snowden in 2013.

Wall Street is also improving its finance-related cyberabilities. On July 18, 2013,
a securities industry trade organization sponsored a financial war game, called
Quantum Dawn 2, that involved more than five hundred individuals from about fifty
entities and government agencies. Quantum Dawn 2 was aimed principally at preventing
attacks that would disrupt normal trading. While useful, this goal falls short of
preparing for a more sophisticated type of attack that would mimic, rather than disrupt,
order-entry systems.

China is not the only major power fighting a financial war. Such warfare is being
waged today between the United States and Iran, as the United States seeks to destabilize
the Iranian regime by denying it access to critical payments networks. In February
2012 the United States banned Iran from the U.S. dollar payments systems controlled
by the Federal Reserve and the U.S. Treasury. This proved inconvenient for Iran, but
it was still able to transact business in international markets by converting payments
to euros and settling transactions through the Belgium-based SWIFT bank message system.
In March 2012 the United States pressured SWIFT to ban Iran from its payments system,
too. Iran was then officially cut off from participating in hard-currency payments
or receipts with the rest of the world. The United States made no secret of its goals
in the financial war with Iran. On June 6, 2013, U.S. Treasury official David Cohen
said that the objective of U.S. sanctions was “
to cause depreciation of the rial and make it unusable in international commerce.”