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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?

Read Part II: Narco Dollars On Your Map

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