note: the series was first edited and published at narconews.com

October 31, 2001

    Narcodollars for Beginners:
How the Money Works in
the Illicit Drug Trade

Part 2- the Narco Money Map

 

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.

Narcodollars On Your Map

It helps to look at the drug markets by looking at a map of the United States.

What are the four states with the largest market share in illegal narcotics trafficking? Draw a map if you want and shade them in on your map.

Yup. You got it.

New York, California, Texas and Florida.

It makes sense. Those are the biggest states. They have big coastal areas and borders and big ports. It would make sense that the population would grow in the big states where the trade and business flow grows. If you check back to Part I of "Narco Dollars for Dummies", we described two businesses. One was Sam's sugar business that had a SLIM PERCENTAGE profit. The other was Dave's drug business that had a BIG PERCENTAGE profit. It would make sense that these four states would be real big in both Sam's sugar business and Dave's drug businesses.

OK. Now. What are the four states with the biggest business in money laundering of narco profits and other profits of organized crime?

Not surprising? Same four states. They are all known as banking power places.

New York, California, Texas and Florida.

What's next? What are the four states with the biggest business in taking the laundered narco profits and using them to deposit money in a bank, or to buy another company, or to start a new company, or just buy stock in the stock market? That's what I call the reinvestment business.

Same four, right? New York, California, Texas and Florida.

Who were the governors of these four states in 1996?

Well, let's see. Jeb Bush was the governor of Florida. Governor Jeb was the son of George H. W. Bush, the former head of an oil company in Texas and Mexico and the former head of the CIA and the former head of the various drug enforcement efforts as Vice President and President. Then George W. Bush, also the son of George H. W. Bush, was the governor of Texas. So the governors of two of the largest narco dollar market share states just happen to be the sons of the former chief of the secret police.

Do you think it is possible to become the governor of a state with the support of the SLIM PERCENTAGE profit businesses and the opposition of the BIG PERCENTAGE profit businesses, particularly after the BIG PRECENTAGE profits have bought up all the SLIM PERCENTAGE profit businesses?

What about president?

Of course, George W. is President today fueled by the single most successful campaign fundraising in the history of Western civilization. Now do you know why Hillary Clinton wanted to be a Senator from New York? Now do you know why Andrew Cuomo wants to be New York governor and is reported to be doing polls to see if people associate him with the Mafia and organized crime?

When you think about it, the President would need to win the majority of the people who donate from the SLIM PERCENTAGE profit businesses but control the reinvestment of the BIG PERCENTAGE profit industry cash flow to win. The competition for the support of the people who control the reinvestment from the BIG PERCENTAGE profit business cash flow in the biggest states would be fierce.

According to the Center for Responsive Politics analysis of the 2000 elections, donors in California, New York, the District of Colombia Metro Area (which is full of lawyers and lobbyists who represent all the other states), Texas and Florida contributed $666.8 million, or approximately 47 percent of a total of $1.427 billion in donations.

I can just paraphrase Tina Turner singing in the background. Care to hum along with us? …."What's drugs got to do…got to do…. with it?"

Getting out of Narcodollars HQ

In 1996, my company and I were targeted by a private informant and a group of investigators working for the Department of Justice and the Department of Housing and Urban Development (HUD). If you have ever seen the movie "Enemy of the State" with Will Smith and Gene Hackman, then you understand how the drill works.

Will Smith plays a successful Washington lawyer who is targeted in a phony frame and smear by a US intelligence agency. The spooky types have high-speed access to every last piece of data on the information highway - from Will's bank account to his telephone conversations - and the wherewithal to engineer a smear campaign through the papers and the Council on Foreign Relations types.

The organizer of an investment conference once introduced me by saying, "Who here has seen the movie Enemy of the State? The woman I am about to introduce to you played Will Smith in real life."

One day I was a wealthy entrepreneur with a beautiful home, a successful business and money in the bank. I had been a partner and member of the board of directors of a Wall Street firm and then Assistant Secretary of Housing-Federal Housing Commissioner during the Bush Administration. I had been invited to serve as a governor of the Federal Reserve Board and instead started my own company in Washington, The Hamilton Securities Group. Thanks to our leadership in digital technology, financial software and analytics, Hamilton was doing well and poised for significant financial growth.

One of my software tool innovations, Community Wizard, helped communities access data about how all the money works in their place. Accessible through the World Wide Web, Community Wizard was illuminating an unusual pattern of defaults on HUD mortgages and other government and homeowner losses in areas in which the CIA had admitted to facilitating cocaine trafficking by Iran Contra supporters.

According to the CIA, we were paying our government to help the narco dollars make money in a way that - if you read Community Wizard's comic book-like money maps - was losing taxpayers and homeowners billions of dollars.

The next day I was hunted, living through 18 audits and investigations and a smear campaign directed not just at me but also at members of my family, colleagues and friends who helped me. I believe that the smear campaign originated at the highest levels. For more than two years I lived through serious physical harassment and surveillance. This included burglary, stalking, having houseguests followed and dead animals left on the doormat. The hardest part was the necessity of keeping quiet about the physical danger lest it cost me more support or harm my credibility. Most people simply do not believe that such things are possible in America.

In 1999, I sold everything to pay what to date is approximately $6 million of legal and administrative costs. My estimate of equity destroyed, damages and opportunity costs is $250 million. I moved to a system of living in several places on an unpredictable schedule in the hope that this would push up the cost of surveillance and harassment and so dissuade my tormentors from following.

The places were chosen to move me as far away as possible from the corridors of power in Washington and on Wall Street filled with people benefiting from narco dollars and their reinvestment. That strategy-combined with excellent legal and administrative work by a first rate team of very courageous people--- has been successful in besting the targeting. It made it possible for me to understand how our economic addiction to narco dollars worked and how to it was draining our neighborhoods. I teamed up with the members of my family and friends and their neighbors who were getting drained.

Four days after Insight Magazine published its cover story on me this summer, the head investigator targeting us resigned unexpectedly. Three weeks later the last of 18 audits and investigations was suddenly closed down. A follow-up article by Insight's Paul Rodriguez described the closed investigation as something that "many inside both HUD and the Department of Justice regarded as a political vendetta against Fitts."

The miracle had happened. We have overcome a serious targeting. Like in the movie where Will Smith comes out fine, my story has a happy ending. It's a wonderful feeling. As Winston Churchill's once said, "Nothing is more exhilarating than being shot at without result."

I believe that one of the reasons for my happy ending was that our actions to deal with the investigation reflected the understanding of narco dollars that I acquired from living and traveling throughout America and talking with people from all walks of life about how narco dollars were impacting our lives and neighborhoods in many different places.

Understanding narco dollars is something I need to know to help entrepreneurs around the country build the profitable deals and businesses that will get the Solari Index and Dow Jones in our neighborhoods rising together.

Where I live, folks do not want to know about what is wrong on the Titanic. They do not want to know that a flood of narco dollars is rolling over us. They know these things. What they want to know is how to build arks.

Georgie, West Philadelphia,
and the Stock Market

One of my new homes is in the city in Philadelphia, near where I grew up in West Philadelphia. Another is in a very beautiful and close knit farming community in Hickory Valley, Tennessee where my father's family has lived since the 1850's.

Once a month I drive to Philadelphia from my home in Hickory Valley to attend a board meeting. I stay in a lovely little apartment in the first floor of a row house owned by my friend Georgie.

Georgie is one of my favorite people in the world. She lives in the apartment on the second floor. Just about my favorite thing in the world is hanging out with Georgie. We watch Oprah, we talk, we go to movies, and we giggle over ice cream with long names and cookies. Georgie is an awesome cook and my little apartment fills up daily with the smells of something delicious that Georgie is making.

One day, Forest, my dog, and I were up in Georgie's apartment to enjoy a fresh plate of scrapple that Georgie had fried up that morning. The conversation turned to narco dollars. Georgie said that looking at the big picture was simply too overwhelming. Couldn't I explain this without using the words millions or billions - just dollars and cents in terms of our neighborhood in West Philadelphia?

I always have this problem explaining international money flows to moms and grandmoms. Most really great women want to know about the real world. The world of real people - her world full of her kids and grandkids and other kids she loves.

So we got out a blank piece of paper and started to estimate.

Every day there are two or three teenagers on the corner dealing drugs across from our home in Philadelphia. We figured that if they had a 50% deal with a supplier, did $300 a day of sales each, and worked 250 days a year that their supplier could run his net profits of approximately $100,000 through a local fast food restaurant that was owned by a publicly traded company.

Assuming that company has a stock market value that is a multiple of 20-30 times its profits, a handful of illiterate teenagers could generate approximately $2-3 million in stock market value for a major corporation, not to mention a nice flow of deposits and business for the Philadelphia banks and insurance companies.

The Narcodollar Double Bind: Dow Jones Index Up, Solari Index down

As described in Part I, 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. The Solari Index is about how safe you feel you and your neighbor's kids are.

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 pinball. 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 I think the Solari Index in my old neighborhood is 0 percent.

Life on the street ain't sweet anymore.

To understand how this works, we need to understand "pop."

It's Not Just About the Profit,
It's About the Pop

Here is the part that is particularly hard for women. It took several times at our sheet of paper before Georgie understood what I was saying.

The power of narco dollars comes when you combine drug trafficking with the stock market.

The "pop" is a word I learned on Wall Street to describe the multiple of income at which a stock trades. So if a stock like PepsiCo trades at 20 times it's income, that means for every $100,000 of income it makes, it's stock goes up $2 million. The company may make $100,000, but its "pop" is $2 million. Folks make money in the stock market from the stock going up. On Wall Street, it's all about "pop."

The people who own a corporation make money on the stock going up. So a company has investors, with the most powerful investors typically being large institutions who are typically represented on the board of the company. The board is the group of people who decides what goes. The senior management officials who run the company day to day are also on the board. Most of the money they make comes from stock options that they get to encourage them to get the stock to go up for the investors. That means that what everyone who runs the company wants is for the stock to go up. The way to do that is to increase net income or to increase the multiple at which the stock trades.

So in the case of PepsiCo described above, if the management increases soda pop sales in a way that net income goes up by $100,000, the stock goes up $2 million. Now let's say, the board and management do a whole series of things to attract new investors and improve the company's image and, as a result, the stock starts trading at 22 times profits. Then, the stock value goes up even more. Whether increasing net income or increasing the multiple at which the stock market values the company profits, the board and the management are focused on making the stock go up. That is how their money works.

The winner in the global corporate game is the guy who has the most income running through the highest multiple stocks. He is the winning pop player. Like the guy who wins at monopoly because he buys up all the properties on the board, he can buy up all the other companies.

So if I have a company that has a $100,000 of income and a stock trading at 20 times earnings, if I can find a way to run $100,000 of narcotics sales by a few teenagers in West Philadelphia through my financial statements, I can get my stock market value to go up from $2 million to $4 million. I can double my "pop." That is a quick $2 million profit from putting a few teenagers to work driving the Solari Index down in their neighborhood. Bottom line, I can make a lot of quick money on the stock going up and the Solari Index going down

OK, now what does this all mean for the Solari Index in Philadelphia? If I am a group of mothers in my neighborhood who want the Solari Index to go back up to a 100%, what's stopping me?

Well, if the Department of Justice is correct about $500 billion-to-1 trillion of annual money laundering in the US, then about $20-40 billion should move annually through the Philadelphia Federal Reserve District.

Assuming a 20% margin for the BIG PERCENTAGE profits and a 20 times multiple on the stock of the companies that Dave and his investors and banking partners were using to launder the money, let's look at how much of the stock market value would be "addicted" to the drug and money laundering profits flowing through the Philadelphia area.

The total stock market value generated in the Philadelphia area with $20-40 billion in narco retail sales would be about $80-160 billion. If you add all the things you could do with debt or and other ways to increase the multiples, and you could get that even higher, say $100-250 billion.

Assuming that there are 3 million people in the greater Philadelphia area, the total stock market value generated would average anywhere from $27,000-to-$85,000 per person. Imagine what would happen to the economy in Philadelphia if this stock market value suddenly disappeared because all the teenagers in Philadelphia stopped dealing or buying drugs?

Imagine what happens to your stock multiple if you are a Philadelphia corporate chieftain and you don't run narco dollars or large purchases fueled by narco dollars through your financial statements and you don't attract narco dollars to reinvest in your stock? What happens to your corporate income and your stock profit if the ones who invest narco dollars - accumulated over the last fifty years compounding at their magical compound interest - don't like you? How is everyone in Philadelphia who loses money on your stock going down going to feel about you?

The Department of Justice says that we launder $500 billion -$ 1 trillion. Multiply those times a BIG PERCENTAGE cash flow profit margin. Now figure how much of that "income" gets run through the income statement of publicly traded banks and companies and multiply that number by the multiple of income at which their stocks trade.

Voila. I don't know what your number is. All I know is that, as Ed Sullivan used to say, it is "really, really BIG."

 

Part III: Drugs As Currency