Sunday, October 7, 2007

Terrorist Nightmare on Wall Street

"Past history and recent intelligence have shown that New York City, a critical node of the U.S. economy, is clearly in the terrorist's crosshairs." - John Sudnik, Dirty Bomb Attack: Accessing New York City's Level of Prepardness From A First Responders Perspective. Naval Postgraduate School, Monterey, CA.

Here is a short story describing a possible dirty bomb attack on Wall Street and how such an event might impact the U.S. economy and financial markets. Let us hope this third Islamic terrorist attack on Wall Street will never happen, but remember 9/11 was the second terrorist attack against the World Trade Center Towers. Could both incidents have been an attempt to topple the World Trade Centers twin towers into the NYSE building? As an investment professional and a close follower of the news and current events, I would not recommend that you bet your entire investment portfolio that this nightmare on Wall Street never happens.

To set the stage we have three different types of investors in this scenario: First, there is Paul, a dentist in St. Paul, Minnesota. Paul has his entire qualified retirement plan managed by a major investment firm in New York City. Second, there is John, an entrepreneur in New Jersey. His business is located about thirty miles west of Manhattan. John has half of his investments in U.S. global mutual funds and a U.S. variable annuity. The rest of John's investments are in a global portfolio managed by a private bank in Geneva, Switzerland. Third, is a wealthy, pro-western Saudi businessman. His investment portfolio is managed by a large international bank headquartered in Charlotte, North Carolina.

The event:

An Islamic terrorist group managed to obtain enough radioactive materials and conventional explosives to construct a dirty bomb. The explosives were strategically positioned in vacant warehouses in New Jersey just north of the Newark Airport and the detonation was timed to take place during a winter day when the winds were blowing east south east, carrying the radiation across the Hudson River area of New Jersey, on across lower Manhattan Island, and then on to Long Island.

Another advantage of this particular wind direction was that the Wall Street emergency back up facilities, back office operations, and data storage centers were located in eastern New Jersey and western Long Island. Terrorist cells, along with the American people had been told of these emergency locations and back up facilities following the 9/11 attack three years earlier in an attempt to ease investor concern and stop a possible market panic during the market closure. Of course, it did not take a rocket scientist to figure out that the hundreds of thousands of Wall Street workers would need the back up emergency facilities within easy commuting distance of Manhattan to make the system work.

While the physical damage to the Newark warehouse district was quite extensive, the number of lives lost there was minimal. The problem began with the radiation, debris, and dust cloud which swept across a narrow but widening area beginning on the Hudson River, taking in the southern part of Manhattan including Wall Street and covering much of western Long Island.

The resulting rioting and panic as the radiation cloud moved over Manhattan killed over 100,000 people, as millions of residents and commuters tried to flee. This, however, was just the beginning of the problem. After the panic had subsided came the radiation sickness and poisoning. The markets were immediately closed and the U.S. army cordoned off the entire area as millions of sick refugees were slowly decontaminated and allowed through the lines to be transported to emergency medical treatment facilities all across the United States. The tragedy and Wall Street holocaust, as it became known, resulted in the largest number of Jewish deaths since the Nazi holocaust - something that the terrorists had been calculating.

The terrorists hated America, Israel, and Saudi Arabia with almost equal intensity. Another component of their terrorist plan had been for selected supporters in Saudi Arabia within the banking and financial industry to spend hundreds of millions of dollars buying put options on the U.S. stock market in the days leading up to the attack. Their plan was not just to destroy the U.S. financial markets, but to also take down Saudi Arabia in the process. Even though they knew the tremendous profits from these market puts would be disallowed, their actions within the Saudi financial establishment had a more important goal: Making these investments also served to implicate the Saudi financial establishment and government which, when discovered, brought the full wrath of U.S. public opinion and the government down on Saudi Arabia. Every dollar of Saudi funds by individuals, banks, financial managers, and even the government invested in the U.S. markets were frozen and seized.

Immediately following the attack, all existing Presidential Emergency Orders were activated and all banks and investment markets were shut down. The press was forbidden to publicize or even discuss the amount of contamination to Wall Street and, more importantly, to the back up emergency centers. All they could say was that the investment markets are sound and closed on a temporary basis until we can get the employees back into New York City. The media downplayed the damage to the facilities and all evidence of the rioting and massive panic that caused most of the initial causalities. All freedom of speech, civil liberties, the Bill of Rights, Habeas corpus, and constitutional protections were suspended for the duration of the emergency.

The problem the media did not tell investors was that the contamination of the area meant it had to be quarantined for a minimum of six months before clean up crews could make it safe for the financial service employees who survived to return to work.

While the human toll from the terrorist attack was incalculable due to the delayed effects of the radiation poisoning, the financial toll was not. The American dollar lost 70% of its value during the six-month period compared to the Euro, the Yen and the Swiss Franc. There was a brief one week solidarity closure of all world markets but eventually one at a time they started trading again. The U.S. markets remained closed as the 'temporary' one week delay stretched to 3 weeks, then 2 months, then finally 6 months.

The foreign market panic finally subsided as investors outside the U.S. and American investors with funds outside the closed American markets picked up investments at very low prices. It became apparent that Americas misfortune would throw all liquidity-starved U.S. companies and citizens into a depression far worse than the Great Depression of the 1930s. Although the banks opened back up after a month, there were severe limits on the amount of funds which could be withdrawn from checking or savings accounts. No U.S. stocks or bonds could be traded, as was the case for mutual funds, investment management accounts, and variable annuity portfolios.

After six months, the U.S. markets opened again on a limited basis for a few hours each day but there was little interest with the Dow trading at around 1,000 and the NASDAQ was down to 120. The minimal liquidity available in the U.S. and the Presidential Executive Orders allowing only 5% of a bank account, security or portfolio to be liquidated per month turned corporate America into a buying basement opportunity. Foreign investors and the few Americans with liquidity from investment accounts outside the closed U.S. markets purchased U.S. securities at a mere fraction of their values before the attack.

Did the American economy recover? Yes, but at a high price for investors. Many of our corporations became foreign owned and controlled when they were picked up at stock prices for pennies on the dollar at the market reopening. The real estate market crashed like everything else and we went through a period similar to what Russia went through after the fall of the former Soviet Union. Eventually, the extreme Presidential Executive Orders were moderated and America slowly returned to normalcy but investor confidence and portfolios were devastated.

What happened to Paul, John, and the Saudi businessman?

Paul, the dentist in St. Paul, Minnesota, had his entire qualified retirement plan managed by a major investment firm in New York City. It took Paul and his accountant years to prove what was in his retirement plan investments, since most of the records were destroyed in the panic, and the investment firm employees perished in the disaster. When the market finally reopened and the statements were again available, Paul ended up with about 5 cents on the dollar because many of his equity holdings had declared bankruptcy during the year following the attack.

John, the entrepreneur with half of his investments in global mutual funds and a variable annuity and the rest in a managed global portfolio handled by a private bank in Geneva, Switzerland, was better off. John heard the explosion and saw the cloud heading toward the Hudson River and Manhattan but the wind direction spared his area of the destruction and panic. All of his global mutual funds were headquartered in the Wall Street financial district so they, along with his variable annuity, were frozen during the six-month market closure.

However, John did not know at the time that even though the funds were frozen, the underlying foreign securities kept trading and his portfolio actually increased about 30% when the U.S. markets started trading again. The 70% fall in the dollar that continued after the six months period actually helped restart the American economy. This translated into a 100% purchasing power gain in John's foreign funds. Although it took him 20 months to liquidate his U.S. investments at the 5% allowed each month, he eventually sold all at a profit. The money managed by the private bank in Geneva, of course, continued being managed in non-U.S. investments and he was able to use the proceeds to purchase several quality properties in the distressed U.S. real estate market after the collapse.

The Saudi businessman with his investments managed by an international bank in Charlotte, North Carolina, was horrified at the attack but he and other Arab investors, regardless of their political persuasion, suffered the greatest financial losses from the terrorist attack. The American government froze most Arab government and individual private investments during the market closure and these assets were temporarily transferred to the American treasury until the real culprits behind the attack were apprehended and tried. It has been five years now and the U.S. government has yet to release any of his U.S. investments even though his name has never appeared on a suspect list. In the end, it really did not matter because Saudi Arabia and the other remaining moderate or pro-American nations all overthrew their existing governments and became militant Islamic republics, due to the Moslem worlds outrage at the American asset freeze and confiscation.

This is a long case study but is important to think about if you share my concerns of a future attack. I do not have inside information or a crystal ball but this is what I think could possibly happen if Islamic terrorists are able to build and detonate a dirty bomb or weapon of mass destruction.

Currently, I do not have a single dime invested in the American stock market because I believe the risk of another terrorist attack is too great. Islamic terrorists have already twice targeted the Wall Street area of New York City. If in the future they have the capacity to use a WMD, every investor in the U.S. markets could be left holding the bag and little else, since the American markets could be closed for six months or more depending on the technology damage, death toll in the financial industry, and degree of contamination.

Have you considered the likely consequences for another terrorist attack against New York City and Wall Street? Have you found yourself wondering why media reports constantly warn about the likelihood of an Islamic terrorist attack on a U.S. target with a weapon of mass destruction or dirty bomb, but there is never any speculation as to the possible target? There are simple reasons. First, we have no way to prevent such an attack. It is just that simple. Second, the government warning of a threat to the U.S. financial markets would generate a financial and market panic that could equal the effects of the actual terror attack.

Obviously Washington and the financial establishment have decided it is best to treat the terrorist attack risk to Wall Street like every stock market collapse--as something that will never happen but always does. There will be no warning, no suggestion to diversify outside of New York Stock Exchange and NASDAQ securities, or out of mutual funds and variable annuity products in these investments.

Will this horrible nightmare take place? I surely hope not, but I urge investors to take this scenario risk into consideration when reviewing how much of their portfolio is invested only in the U.S. dollar and Wall Street investment markets.

Ron Holland is the author this article and it is from the online book, The Swiss Preserve Solution at This is a politically incorrect guide to defending your wealth & liberty from internal and external 21st Century threats.