In the past month we've had several points of confirmation regarding things we've covered for over a decade in this Blog and our books. There are a half-dozen dramatic examples that have cropped up this year alone. But for sake of simplicity and focus, we will concentrate on just one of these. It certainly bears watching.
For those who read Economic Warfare: Risks and Responses published eight years ago (access the text in multiple formats here) or Secret Weapon: How Economic Terrorism Brought Down the U.S. Stock Market and Why It Can Happen Again released five and a half years ago, or any of a number of our blog posts (most recently here), you know of the suspicious activity surrounding Barclays and Qatar in the financial crisis. Now, four former Barclays executives have been charged by the Serious Fraud Office (SFO) in the UK. This is monumental. We are hopeful that they will dig into all of the very unusual series of events that have taken place and how Barclays and Qatar seem to be ever-present as things were collapsing, appearing to earn unusual profits at every turn.
We found numerous suspicious practices almost from the moment that Barclays and Qatar were first introduced in 2007. There are legitimate questions regarding Barclay's role in the rise and fall of oil prices and its connections with SEM Group in Tulsa, Oklahoma. Barclays had a role in crafting a short selling technique that would allow Sharia Compliant funds to sell short stocks (with one observer excited about the prospect of shorting banks). This happened just before the financial collapse that included massive naked short selling of Lehman Brothers. Lehman's failure was clearly identified as a bear raid by the likes of George Soros. The New England Complex Systems Institute also documented what happened to the banks as a purposed and targeted attack.
There are serious questions about Barclay's role in rigging markets. The day after the bank paid 290 million British pounds ($450 million) in fines for manipulating LIBOR (the London Interbank Offering Rate on which much of our financial system has been pegged), a Barclays trader began manipulating gold prices. This eventually cost the bank a $44 million fine.
There are questions about why Barclays' interest in Lehman Brothers disappeared when Lehman needed a rescue partner. Lehman's failure was THE trigger in the financial collapse that changed the world. There are questions as to why Barclays was able to secure Lehman assets from bankruptcy after rejecting the rescue. And, why were Qatar and the UAE allowed to pull out financing from Barclays in the midst of a banking crisis? For that matter, there are serious questions as to why and how Qatar made such a large investment in Barclays that allowed this one large bank to be the only bank in the U.S. or U.K. not forced to take bailout money from TARP or the UK equivalent.
It is the last set of questions that has recently made news. In many ways, this transaction that took place in June 2008 represents the foundation for all of the concerns raised. For example, Qatar and the Qatari Sovereign Wealth Fund play a large role in the energy markets. There are legitimate arguments that middle eastern Sovereign Wealth Funds were involved in manipulating energy prices higher through the oil futures markets. Richard Eckaus, Chairman Emeritus of the Economics Department at MIT made it clear that the oil price rise in 2008 was a speculative bubble based on price manipulation using oil futures. In private conversations, he acknowledged that the Sovereign Wealth Funds of the middle east would be uniquely positioned to both cause and profit from such activity. This is significant because as Barclays investors, the Qatari Sovereign Wealth Fund might have been given access to both sides of the trade (knowing what the buyers and sellers of oil futures were doing), thus guaranteeing success. This would have been an illegal manipulation, of course. But we know that Barclays has been caught twice for manipulation so asking this question is not unreasonable.
"…if somebody has your book and knows every trade, it would not be difficult to bet against that book and put the company into a tremendous liquidity squeeze…"
Barclays ultimately held control of the enormous SEM Group short position on oil. They were the largest sellers of oil futures. The traders at SEM Group had been confident that oil was overpriced as it rose to $147/barrel in the summer of 2008, so they took a huge short position. At one point, SEM Group controlled almost 20% of America's oil inventory. Barclays knew their positions as SEM Group was turning to them for financing. At the same time, Barclays was in negotiation with the Qatari Sovereign Wealth Fund. As Goldman Sachs later admitted, every large buy in the oil futures market moved the price of oil higher. So middle eastern Sovereign Wealth Funds became logical buyers because they could push prices higher and then profit from the higher prices. This would create a "short squeeze" against anyone like SEM Group who was betting oil prices would fall.
So, in theory you have a massive short squeeze potentially perpetrated by a middle eastern Sovereign Wealth Fund using Western banks to push oil prices up as much as $50 per barrel in the first half of 2008. Some estimates are that this was a $500 billion scam, where oil consumers paid out a half-trillion dollars in the midst of a recession. That was just the tip of the iceberg. Henry Kissinger and Martin Feldstein called the long-term runup in oil prices "the largest transfer of wealth in human history." Money went from the west to the middle east. Of course, the parabolic rise in oil prices was unsustainable. At some point the Sovereign Wealth Funds would have to be prepared to push prices lower and profit from the decline.
In 2008, the small but experienced group of oil traders in Tulsa, Oklahoma (SEM Group) knew that oil was overpriced. They take out massive short positions but the market kept rising. They become desperate for capital, turning to Barclays for help. At about the same time, Qatar would take a massive equity stake in Barclays, using questionable means to get control. Barclays then grabs the SEM Group book of business and enjoys all the profits as the short positions begin to pay off. SEM Group falls into bankruptcy, knowing they were right about oil but lacking the staying power to win. Oil collapses from almost $150 to under $30 per barrel in a matter of months. In less than 30 days, Barclays was sitting on a $1 billion gain. Ultimately, press reports suggest that Barclays profited as much as $3 billion. That's not pocket change. To a bank in the midst of a financial crisis, $3 billion could make the difference between success and failure.
As all of this unfolded, Barclays and Qatar were linked in a series of unusual transactions. Their connection happened just as Barclays profited $3 billion. Interestingly, Barclays loaned Qatar $3 billion. And Qatar made nearly $15 billion of investments in Barclays in two tranches (4.5 billion British pounds in June 2008 and another 7.3 billion in October). This gave Qatar de facto control at Barclays, eliminating the possibility of UK bailout scrutiny. These transactions are also what has brought about the charges from the Serious Fraud Office.
There are MANY questions that can and should be asked about all of this. For example, was the main purpose for Barclays to avoid UK oversight through this seemingly very incestuous deal with Qatar? A bank shouldn't be allowed to make a loan to someone who then invests the money back in the bank. On the surface this makes their capital accounts look stronger even though it is really just paper shuffling. It's similar to one kid writing a $1 million check as a "loan" to a friend who then hands a $1 million check back as an "investment." It might look like they were both worth a million dollars but no real money actually changed hands. In the case of Qatar and Barclays, real money eventually changed hands but it seems suspicious nonetheless as it allowed Barclays to escape government bailouts and scrutiny.
At the start of all of this, Barclays had expressed serious interest in buying key assets from Lehman Brothers. But then there was a bank run on Lehman Brothers that may well have emanated from Sovereign Wealth Funds in the middle east. Was Qatar short Lehman just as Qatar was investing in Barclays? Remember that the year before, Barclays helped create a mechanism that allowed Sharia-Compliant funds to sell banks short without violating Sharia restrictions. After that, there were bear raids on Bear Sterns and Lehman Brothers, two historically Jewish banks. These attacks put the entire Western financial system at risk.
It was reported that Barclays would not rescue Lehman because the shareholders were not in approval. The most significant shareholder at that point was Qatar. Had Qatar wanted Lehman rescued by Barclays it would have happened. We know that Barclays had been very interested in Lehman before their bankruptcy and also willing to buy Lehman assets after their bankruptcy. And we know that Barclays was forced to MARK UP their holdings of Lehman assets because they bought them so cheap compared to their actual value. Shortly thereafter, Qatar took serious capital out of Barclays while other banks in the U.S. and U.K. were forced to take on government bailouts with all the restrictions involved.
The final element to add to this toxic mix is the recognition of who was making decisions at the Qatari Sovereign Wealth Fund. Egyptian Sheik Yusuf al-Qaradawi would have had great sway over the fund as one of the most recognized Muslim Brotherhood scholars resident in Qatar. He also boldly called for the demise of the Western financial system to be replaced by Islamic finance. He urged Muslims to "profit from the crisis to bring about the triumph of the (Islamic) nation." In hindsight, it is clear that Barclays and Qatar profited handsomely from the crisis. In addition, Qatar used their windfall to finance the Arab Spring just a couple of years later, much to the approval of al-Qaradawi and the Muslim Brotherhood.
The wheels of justice sometimes move very slowly. We find it heartening to note that the UK Serious Fraud Office (SFO) finally has brought charges against Barclays. This is the first time that the SFO has brought any charges against a bank regarding the 2008 crisis. This is also happening at the same time that Egypt, Saudi Arabia, the UAE, and Bahrain have brought pressure on Qatar to expel the Muslim Brotherhood. We hope that the SFO and the coalition of nations pressuring Qatar will dig deeply enough to get answers to all of the questions regarding Barclays' and Qatar's role in the 2008 crisis that nearly destroyed the Western financial system.