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By Root 796 0

stifle competition, engage in bid rigging, recruit agents or manipulate markets. I did not assert that such activities were common, let alone the norm, but rather that such activities were possible and the United States needed to develop a stronger watch function to protect its national security interests. Along with these specific threats, I suggested an even greater threat: a full-scale attack on Western capital markets to disable the engine of capitalist society. My presentation included metrics and system specifications to monitor sovereign wealth fund behavior, to look for behind-the-scenes malign acts and to identify financial choke points—the information age equivalents of the Suez Canal or the Strait of Hormuz—which could be monitored to prevent or fight off future financial attacks.

By the end of the two-day event, the Defense Department officials in attendance seemed satisfied that the lab had developed a solid core of experts, subjects and threat analysis with which to take the war game to the next level.

The core group of experts met again at the lab the following month to continue developing the financial war game. In addition to the APL hosts and our sponsors from the Department of Defense, there were representatives from other cabinet-level departments, including Commerce and Energy; several major universities, including the Naval War College; think tanks, including the Peterson Institute and RAND Corporation; other physics labs, including Los Alamos; and senior military officers from the staff of the Joint Chiefs.

At this point I noticed the absence of representatives with any actual capital markets experience. I was the only one in the room with a lengthy career on Wall Street that included time at investment banks, hedge funds and exchanges. If we were going to conduct a financial war, we needed people who knew how to use financial weapons—such as front running, inside information, rumors, “painting the tape” with misleading price quotes, short squeezes and the rest of the tricks on which Wall Street thrives. We needed people who, in the immortal words of legendary banker John Gutfreund, were ready “to bite the ass off a bear” when it came to trading currencies, stocks and derivatives. There was no lack of testosterone among the uniformed military or the spies in the room, but they knew no more about destroying a country with credit default swaps than the average stock trader knew about the firing sequence for an ICBM. If this project was going to succeed, I had to persuade Defense to let me recruit some of my peers to make the game more realistic and more valuable for them.

At the October session, I gave a presentation on futures and derivatives to explain how these leveraged instruments could be used to manipulate underlying physical markets, including those in strategic commodities such as oil, uranium, copper and gold. I also explained how the prohibition of derivatives regulation in the Commodity Futures Modernization Act, legislation led by Senator Phil Gramm and signed by President Clinton in 2000, had opened the door to exponentially greater size and variety in these instruments that were now hidden off the balance sheets of the major banks, making them almost impossible to monitor. I finished with a picture of how cutouts, sovereign wealth funds and derivatives leverage could be combined to launch a financial Pearl Harbor for which the United States was completely unprepared. The pregame seminars were beginning to achieve their purpose; the military, intelligence and diplomatic experts were now on the same page as the financial types. The threat of financial warfare was becoming clearer.

Our third group planning session took place in mid-November; this time there were a few new faces, including senior officials from the intelligence community. We were no longer contemplating the feasibility of a financial war game; by now it was game on and we were specifically focused on game design. I presented detailed financial warfare scenarios and made a pitch that the game design should incorporate