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note: this series was first edited and published at
narconews.com
October 24, 2001
Narcodollars for Beginners:
How the Money Works in the Illicit
Drug Trade
Part I in a Series
By Catherine Austin Fitts
Special to the Narco
News Bulletin
Narco News Publisher's
Note: Catherine
Austin Fitts
is a former managing director and member of the board of directors
of Dillon Read & Co, Inc, a former Assistant Secretary of Housing-Federal
Housing Commissioner in the first Bush Administration, and the former
President of The Hamilton Securities Group, Inc. She is the President
of Solari, Inc, an investment advisory firm. Solari provides risk
management services to investors through Sanders Research Associates
in London.
"The Latin
American drug cartels have stretched their tentacles much deeper
into our lives than most people believe. It's possible they are
calling the shots at all levels of government."
- William
Colby, former CIA Director, 1995
A simple framework:
The Solari Index and the Dow Jones Index
The
Solari Index is my way of estimating how well
a place is doing. It is based upon the percentage of people in a place
who believe that a child can leave their home and go to the nearest
place to buy a popsicle and come home alone safely.
When I was a child growing up in the 1950's at
48th and Larchwood in West Philadelphia, the Solari Index was 100 percent.
It was unthinkable that a child was not safe running up to the stores
on Spruce Street for a popsicle and some pin ball. The Dow Jones was
about 500, the Solari Index was 100 percent and our debt per person
was very low. Of course I did not think about it that way at the time.
All I knew was that life on the street with my buddies was sweet.
Today, the Dow Jones is over 9,000, debt per person
is over $100,000 and the my favorite hairdresser in Philadelphia, Al
at the Hair Hut in West Philadelphia, and I just had a debate yesterday
afternoon while Al was cutting my hair about whether the Solari Index
in my old neighborhood was 0 percent (my position) or 10 percent (Al's
position). Men always think it is higher than women.
Despite the boy-girl spread between us, it is fair
to say that Al and I agree that the Solari Index is in the tank ---both
in the streets of Philadelphia and throughout America.
Life on the street ain't sweet any more. I watched
the slide of the Solari Index as a child. A lot of it had to do with
narcotics trafficking and the people that narco dollars put in power
on our streets - and in city hall, in the banks, in Congress and the
corporations and investors down town and that ring the city.
My mission is to see the Solari Index return to
100 percent and to do so in a manner that moves the Dow up and our debt
per person down and makes me and my partners a whole pile of money.
A few years back when my efforts to improve the
Solari Index were threatening to reduce narcotics profits in a few places,
I discovered that I could not look to the enforcement or the judicial
establishment funded with my tax dollars to protect me. Narco dollars
had the upper hand throughout government and the legal establishment.
That's when I decided that I would have to learn
how the money works on the drug trade.
Here is what I have learned that has been useful
to me---- and may help you have a better map of how narco dollars impact
you, your business, your family and the Solari Index in your neighborhood.
The Economic of Production
Sam and Dave do Boatloads of White Agicultural Substances
Okay,
let's start at ground zero. It is 1947, and
World War II is over. America is ready to go back to work to build the
corporate economy. We are in New Orleans on the docks.
Two boats pull into the docks. The first boat is
full of a white agricultural product grown in Latin America called sugar.
The owner of the cargo, lets call him Sam, sells his boat load of white
agricultural substance to the sugar wholesaler on the docks for how
much money?
Ok, so let's say that Sam sells his entire boatload
of sugar to the sugar wholesaler on the docks for X dollars.
Now, after Sam pays his workers and all his costs
of growing and transporting the sugar, and after he and his wife spend
the weekend in New Orleans and he pays himself a bonus and buys some
new harvest equipment and pays his taxes, how much cash does he have
left to deposit into his bank account? Or, another way of saying this
is: What is Sam's net cash margin on his sugar business?
Well, it depends on how lucky and hard working
and smart Sam is, but let's say that Sam has worked his proverbial you
know what off and he makes around 5-10 percent. Sam the sugar man has
a 5-10 percent cash profit margin. Let's call Sam's margin S for slim
or SLIM PERCENTAGE.
Back on the docks, the second boat---an exact replica
of the boat carrying Sam's sugar---is a boat carrying Dave's white agricultural
product called drugs. In those days this was more likely to be heroin,
these days more likely to be cocaine. Whatever the precise species,
the planting, harvesting and production of this white agricultural substance,
Dave's drugs, are remarkably like Sam's sugar.
Ok, so if Sam the sugar man sold his sugar to the
sugar wholesaler for X dollars, how much will Dave the drug man sell
his drugs to the drug wholesaler for? Well, where Sam is getting pennies,
Dave is getting bills. If Sam had sales of X dollars, let say that Dave
had sales of 50-100 times X. Dave may carry the same amount of white
stuff in a boat but from a financial point of view, Dave the drug man
has a lot more "sales per boat" than Sam the sugar man.
Now, after Dave pays his workers and all his costs
of growing and transporting the drugs, and after he and his wife spend
the weekend in New Orleans and he pays himself a bonus and buys some
new harvest and radar equipment and spends what he needs on bribes and
bonuses to a few enforcement and intelligence operatives and retainers
to his several law firms, how much cash does he have left to deposit
into his bank account? Or, another way of saying this is what is Dave's
net cash margin on his drug business?
It's also going to be a multiple of Sam's margin,
right? Maybe it will be 20 percent or 30 percent or more? Let's call
it B for Big, or BIG PERCENTAGE. Dave the drug man has a much bigger
"cash profit per boat" than Sam the sugar man. Part of that
is, of course, once Dave has set up his money laundering schemes, even
after a 4-10 percent take for the money laundering fees, it's fair to
say his tax rate of 0 percent is lower than Sam's tax rate. While it
is expensive to set up all the many schemes Dave might use to launder
his money, once you do it you can save a lot avoiding some or all of
the IRS's take.
Look at your estimate of Sam and Dave's sales and
profits. Now answer for yourself the following questions.
Who is going to get laid more, Sam or Dave?
Who is going to be more popular with the local
bankers, Sam or Dave?
Who is going to have a bigger stock market portfolio
with a large investment house, Sam or Dave?
Who is going to donate more money to political
campaigns, Sam or Dave?
Whose wife is going to be bigger in the local charities,
Sam or Dave's?
Whose companies will have more prestigous law firms
on retainer, Sam or Dave's?
Who is going to buy the other's company first,
Sam or Dave? Is Dave the drug man going to buy Sam the sugar man's company,
or is Sam the sugar man going to buy Dave the drug man's company?
When they want to buy the other's company, will
the bankers, lawyers and investment houses and politicians back Sam
the sugar man or Dave the drug man?
Whose son or grandson has a better chance of getting
into Harvard or getting a job offer at Goldman Sachs, Sam or Dave's?
Don't listen to me. And don't listen to Peter Jennings,
Dan Rather or Tom Brokaw. Who do you think pays their salaries? Who
owns the companies they work for? Sam or Dave?
Don't listen to anyone else. Think about the numbers
and listen to your heart. What do you believe?
There is very little about how the money works
on the drug trade that you cannot know for yourself by coming to grips
with the economics over a fifty year period of Sam and Dave and their
boat loads of white agricultural substance. It is the magic of compound
interest.
As one of my former partners used to say, "Cash
flow is more important than your mother."
Many Boatloads Later
It's
more than fifty years now since the boats
transporting Sam and Dave's white agricultural products docked in New
Orleans. I don't know what the Narco National Product (Solari's term
for that portion of the GNP coming from narco dollars) was in 1947,
but lets say it was a billion dollars or less. Today, the Narco National
Product that number is estimated to be about $400 billion globally and
about $150 billion plus in the United States.
It helps to look at the business globally as the
United States is the world leader in global money laundering. According
to the Department of Justice, the US launders between $500 billion -
$1 trillion annually. I have little idea what percentage of that is
narco dollars, but it is probably safe to assume that at least $100-200
billion relates to US drug import-exports and retail trade.
Ok, so let's think about how much Sam and Dave
have in accumulated profits in their bank and brokerage accounts.
Let's assume that the US narco national product
in 1947 was $1 billion and it has grown to about $150 billion today.
Assume a straight line of growth from $1 billion to $150 billion, so
the business grows about $3 billion a year and then tops out at $150
billion as the Solari Index has bottomed out at or near 0 percent. America
is about as stoned on illegal drugs as it can get, and growth in controlled
"Schedule II" substances has moved to Ritalin and other cocaine-like
drugs for kids that government programs and health insurance will now
finance.
Let's take the BIG PERCENT margin that we estimated
for Dave the drug man's net cash margin. Let's say that every year from
1947 through 2001, that the cash flow sales available for reinvestment
from drug profits grew by $3 billion a year, throwing off that number
times BIG PERCENT. Okay, assume that the reinvested profit grew at the
compound growth rate of the Standard & Poor's 500 as it got reinvested
along the way.
That amount is an estimate for the equity owned
and controlled by those who have profited in the drug trade. Total narco
dollars. How much money is that? I made an Excel spread-sheet once to
estimate total narco capital in the economy.
My numbers showed` that Dave the drug man had bought
up not only Sam's companies, but ---if you throw in other organized
crime cash flows----a controlling position in about most everything
on the New York Stock Exchange.
When you think about it, this analysis make sense.
The folks with the BIG PERCENT --- big cash margin ---- would end up
rich and in power and the guys working their you-know-what off for SLIM
PERCENT --- a low cash margin --- would end up working for them.
A Real World Example
NYSE's Richard Crasso and the Ultimate New Business "Cold Call"
Lest
you think that my comment about the New York
Stock Exchange is too strong, let's look at one event that occurred
before our "war on drugs" went into high gear through Plan
Colombia, banging heads over narco dollar market share in Latin America.
In late June 1999, numerous news services, including
Associated Press, reported that Richard Grasso, Chairman of the New
York Stock Exchange flew to Colombia to meet with a spokesperson for
Raul Reyes of the Revolutionary Armed Forces of Columbia (FARC), the
supposed "narco terrorists" with whom we are now at war.
The purpose of the trip was "to bring a message
of cooperation from U.S. financial services" and to discuss foreign
investment and the future role of U.S. businesses in Colombia.
Some reading in between the lines said to me that
Grasso's mission related to the continued circulation of cocaine capital
through the US financial system. FARC, the Colombian rebels, were circulating
their profits back into local development without the assistance of
the American banking and investment system. Worse yet for the outlook
for the US stock market's strength from $500 billion - $1 trillion in
annual money laundering - FARC was calling for the decriminalization
of cocaine.
To understand the threat of decriminalization of
the drug trade, just go back to your Sam and Dave estimate and recalculate
the numbers given what decriminalization does to drive BIG PERCENT back
to SLIM PERCENT and what that means to Wall Street and Washington's
cash flows. No narco dollars, no reinvestment into the stock markets,
no campaign contributions.
It was only a few days after Grasso's trip that
BBC News reported a General Accounting Office (GAO) report to Congress
as saying: "Colombia's cocaine and heroin production is set to
rise by as much as 50 percent as the U.S. backed drug war flounders,
due largely to the growing strength of Marxist rebels"
I deduced from this incident that the liquidity
of the NY Stock Exchange was sufficiently dependent on high margin cocaine
profits (BIG PERCENT) that the Chairman of the New York Stock Exchange
was willing for Associated Press to acknowledge he is making "cold
calls" in rebel controlled peace zones in Colombian villages. "Cold
calls" is what we used to call new business visits we would pay
to people we had not yet done business with when I was on Wall Street.
I presume Grasso's trip was not successful in turning
the cash flow tide. Hence, Plan Colombia is proceeding apace to try
to move narco deposits out of FARC's control and back to the control
of our traditional allies and, even if that does not work, to move Citibank's
market share and that of the other large US banks and financial institutions
steadily up in Latin America.
Buy Banamex anyone?
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