In reality, the reason why you lost money is because the game is rigged. The House always wins in the end. The suckers are the ones who think there are rules. Like Wall Street, Vegas exists to separate you from your money.

Wall Street may seem all powerful, but like Vegas it has an Achilles Heel - if the people don't feed the beast it will starve.

If the greed of The House gets to extreme, and the rigging of the games becomes too obvious to ignore, people will stop gambling at the casinos and in the stock market. The House goes broke.

That tipping point, where the willful denial of Main Street starts to break down because the game rigging is so blatant, may have finally been reached.

Against the backdrop of unusually low equity trading volumes, even for a typically sleepy August, continued strong flows out of equities into bonds, and high-profile hedge funds shutting down, a bitter truth is dawning for investment professionals.

Namely, that the ranks of retail investors, commonly derided as "dumb money" by the Street, have made the right call on US equity and bond markets in 2010.

Wall Street has no respect for you at all. Not even a tiny amount. As far as they are concerned, they are the wolves and you are the sheep. They are supposed to eat your life savings. After all, if you are dumb enough to keep throwing money at them after they keep taking your money, then you deserve it.

The common punchline on Wall Street is that once the markets have rallied for a while, you wait for the "dumb money" to rush in for a slice of the action. Then the "smart money" sells out and sit backs as retail investors get hosed when the market falters.

Except this year, the dumb money has resolutely stayed away and kept buying bonds and foreign equities, leaving the professionals twisting in the wind. So far in 2010, $50.2bn has been pulled from US equity funds on top of the $74.6bn in outflows during 2009, while $152bn has flooded into US bond funds, according to EPFR Global.

Pump-and-Dump

For the past decade, the Wall Street shakedown has been a zero-sum game. Wealth hasn't been created. What has happened instead is that wealth has been extracted from the productive and consumer parts of the economy into the financial sector, which creates nothing but debt instruments.

The game of pump-and-dump has been Wall Street's forte since the Dot-Com Bubble. The process extracts wealth from the "dumb money" (i.e. you) to the "smart money" (i.e. Wall Street insiders).

Recently Wall Street has added the High-Frequency Trading Scam, yet another way to rig the game for the insiders.

But to play pump-and-dump the smart money must first buy the assets they plan to later dump on the dumb money. The game doesn't work if the dumb money decides not to play.

If the dumb money can't be convinced to buy the overpriced assets then the smart money is stuck. Eventually they will have to sell those assets, and pump-and-dump doesn't work when the only ones playing are the Wall Street insiders.

Without the dumb money to put a floor under the market, a condition called "lack of liquidity" happens when insiders decide to sell overpriced assets. This usually triggers Federal Reserve action. In other words, the ultimate dumb money (i.e. taxpayer money) rushes in to save the Wall Street gamblers. Of course the taxpayer money card can only be played a limited number of times before the entire game breaks down.

Before I go any further, let's look at just the most obvious ways that Wall Street cons you out of your life savings.

It's Always A Good Time To Buy!

On October 18, 2001, all 15 stock analysts tracked by Thomson Financial/First Call rated Enron a "buy". In fact, 12 of the 15 rated it a "strong buy". On November 8, 2001, of those same group of analysts, 11 of the 15 still rated it as a "buy". Only one of them rated it a "sell".

On December 2, 2001, Enron was bankrupt and tens of thousands of stockholders were broke. This was also at the tail end of the dot-com implosion when stock analysts often gave buy signals right up to the point of bankruptcy for hopeless internet companies.

Because of these buy recommendations, a lot of the Wall Street insiders were able to unload these worthless stocks to suckers like you and me. But this blatant greed sometimes has a backlash.



After Enron the word on Wall Street was "reform". Wall Street was going to fix the mess they had created. Even President Bush, with his strong ties to Enron, joined in for the call for reform.

At the stock market peak in 2007, more than six years after Wall Street was going to clean up the stock analysts mess, what were the results?

Today, after the Nasdaq bust and the outbreak of the deepest financial crisis since the Depression, only about 5 percent of all stock recommendations on Wall Street advise investors to sell, according to Bloomberg.

On A Rating Of 1 to 10

While the stock analysts were peddled to suckers on Main Street, the rating agencies are a prerequisite for Wall Street banks and brokers. They are such an important part of the system that they must register with the SEC.

Credit ratings are written into the regulators’ rulebooks as the basis for bank capital requirements, and dictate how fund managers allocate their assets. For example, AAA ratings are a prerequisite for money market funds, the pooled vehicles that invest surplus cash and which have liquidity and safety of capital as their primary concerns.

There are three rating agencies - Fitch Ratings, Moody's Investors Service, and Standard & Poor's Ratings Services - that dominate the nitch for the entire world's markets, and all of them are based on Wall Street.



And the rating system is now completely broken.

The rating agencies began coaching the companies that packaged up groups of bonds on how they could get higher ratings for their issuances. It's sort of like a teacher helping the student write an essay to get the grade he wants.



This phony rating of structured finance was happening at the exact same time of the housing bubble, thus exacerbating an already dangerous financial distortion.

Those overrated bonds were then sold to foreign investors, pension funds and 401k accounts. They seemed to be everywhere. At some point, they probably wound up in your portfolio.

The rating agencies made lots of money. The Wall Street banks that packaged up the toxic financial waste made lots of money.

Whoever bought the overrated, overpriced junk lost money. Those people were often regular Joes like you and me.

Oh, and did I mention that the rating agencies didn't downgrade Enron out of investment grade until just four days before it went bankrupt?

The 401k Scam

I find it stunning just how many working people still believe in the 401k system. For instance, the stock market today is at the same level it was at in 1998, yet a vast majority of Americans will still tell you that they are "in for the long haul".

Can't people do math? Don't they realize that if they had put the same money in a bank CD for twelve years that they would be much further ahead?

But that isn't even the best reason you shouldn't participate in the 401k system. The best reason to avoid a 401k is the fees.

What most of these workers don't know is that fees, rebates and revenue-sharing agreements among employers, 401(k) administrators and mutual funds -- many of them buried in the fine print or not disclosed at all -- are slowing the growth of their nest eggs. The U.S. Department of Labor lists 17 distinct 401(k) fees, including ones for record keeping, legal services and toll-free telephone numbers. Hidden fees of 1 percent can reduce a worker's 401(k) returns by about 15 percent over 30 years, says Stephen Butler, president and founder of Pension Dynamics Corp. in Pleasant Hill, California, a 30-year-old retirement plan consulting firm.

Of course fees of only 1% fees is an optimistic scenario. Of the nearly $3 Trillion in 401k funds last year, there were $89 Billion in fees. That comes out to about 3%.

According to a survey, 83% of Americans don't know how much they are paying in fees, and a majority didn't realize they are paying any fees.

The vast majority of 401k cash is invested in mutual funds. As Gregory Baer and Gary Gensler explain in their book "The Great Mutual Fund Trap", this is not good news for the small investor.

"Over a five-year period, only about 20% of actively managed stock funds perform well enough to earn back their fees and loads. In five more years, it will be a different 20% that accomplished the same task."

The biggest problem with 401k's in my opinion is the illiquidity of them. Once you have money in there you usually can't get it out without leaving your job, and even then you are faced with daunting penalties. No professional trader would ever put his life savings somewhere that he couldn't cash out when he needed to.

Illiquidity is a major issue. On Wall Street the price of a product falls the more illiquid it is. But the average 401k investor still pays a high retail premium to participate in the most illiquid product he/she will ever engage in (outside of a house).

Two other issues that might dwarf any other problem with 401k's is the risky tax-deferred bet that taxes won't be significantly higher in the future, and the demographic issue of all those baby boomers selling their assets to fund their retirement at the same time.

Silly Rabbit, Trading Is For Insiders

"Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker’s stoutest allies."

- Ferdinand Pecora

Unlike Naked Short selling, the term insider trading is known to most people. Most insider trading is legal and ethical.

How much insider trading isn't legal and ethical? No one knows and no one will ever know for certain, but a Senate investigation in 2006 repeatedly used the term "pervasive". The investigation started off by quoting the figure of 41% in cases of corporate buyouts.

What I consider to be a more accurate portrayal of the amount of insider trading in the markets is the defense of the practice.

It has never been entirely clear why insider trading is illegal. The insider does not cause the outsider to trade at just the wrong time. The insider simply takes advantage of the fact that an outsider is always there to take the other side of the trade.

"The other side of the trade" is also known as the "money losing side of the trade". Don't fall under the false impression that this is the only article defending insider trading.

The Naked truth of illegal Shorting

Now we get into something a little more obscure. While you may think that this doesn't effect you, if you have a 401k or an IRA, it effects you just as much as everyone else.

First you need a definition.

Naked Shorting: Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. But due to various loopholes in the rules and discrepancies between paper and electronic trading systems, naked shorting continues to happen. While no exact system of measurement exists, most point to the level of trades that fail to deliver from the seller to the buyer within the mandatory three-day stock settlement period as evidence of naked shorting. Naked shorts may represent a major portion of these failed trades. Naked shorting is illegal because it allows manipulators a chance to force stock prices down without regard for normal stock supply/demand patterns.

To put this in a way that everyone can understand: people are selling things that they don't own.

The most famous instance of this practice involves Overstock.com Inc., but it afflicts small businesses everywhere.

SCHNEIDER: In March 2005, the Senate Banking Committee confronted then-SEC Chairman William Donaldson with a story about Frank Dobrucki's company, the Nevada-based real estate holding company, Global Links. An investor named Robert Simpson had set out to prove that small companies were indeed frequent targets of abusive naked short sellers. Simpson placed an order for $5,000 worth of stock in Global Links. That got Simpson ownership of all 1.1 million Global Link shares in the market. Not some of them, all of them. UNIDENTIFIED: There were no shares available to be borrowed, and yet in two days, there were over 50 million shares traded. That's clearly something that needs work. SIMPSON: I was absolutely blown away when I bought 1,282,050 shares, which equated to 111 percent of the issued and outstanding. I just couldn't even fathom that. So, it wasn't just crooked, it was Wild West times 10.

This is nothing but theft, plain and simple. And yet I haven't seen any stories of people going to jail for it. I don't know exactly how people do this, but I don't really need to know it. All that really matters is knowing that is is going on.

Love that narco-terrorist money

Late last year the head of the UN Office on Drugs and Crime, revealed how the world financial system managed to survive the 2008 crash.

Drugs money worth billions of dollars kept the financial system afloat at the height of the global crisis, the United Nations' drugs and crime tsar has told the Observer.

Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were "the only liquid investment capital" available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result.

"Inter-bank loans were funded by money that originated from the drugs trade and other illegal activities... There were signs that some banks were rescued that way." Costa declined to identify countries or banks that may have received any drugs money, saying that would be inappropriate because his office is supposed to address the problem, not apportion blame. But he said the money is now a part of the official system and had been effectively laundered.

Oh, sure. It sounds like an exaggeration, right? Isolated events.

Then a couple months ago, there was this revelation.

Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine.

You remember Wachovia, don't you? Remember their slogan "Uncommon Wisdom"? These were the same guys who were giving their customer accounts to telemarketers that they knew ahead of time were going to steal their money.

This also isn't the first time that the banks have been caught with blood-and-cocaine-covered hands.

Every time it happens the banks cut a deal and pay a fine. No jail time. The authorities are after the drug runners, not the banksters.

No big U.S. bank -- Wells Fargo included -- has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.

So who exactly are these guys on Wall Street? Why do they act like mobbed-up criminals? Maybe because that is exactly what they are.

All mobbed-up and no place to go

Remember Overstock.com?

Patrick Byrne, the CEO of Overstock.com, tells about how he was personally threatened by the Russian Mafia when he wouldn't give up his crusade against illegal, naked short selling of his company.

The banks are indispensable parts of any large-scale illegal monetary transaction.

This is from SEC testimony before Congress in December 2000.

Mob involvement on Wall Street is not new. As organized crime advanced into the white-collar arena, the stock market became one of its targets.2 Indeed, there is evidence that organized crime had made inroads on Wall Street back in the 1970's...

Mob activity on Wall Street reportedly increased in the 1990's. On February 10, 1997, The New York Times reported that "Mafia crime families are switching increasingly to white-collar crimes" with a focus on "small Wall Street brokerage houses."

The testimony included highlights such as the June 1999 case where the "Colombo Organized Crime Family of La Cosa Nostra controlled boiler rooms at brokerage firms" and the execution-style deaths of stock promoters Maier S. Lehmann and Albert Alain Chalem.

In fact, it doesn't take a lot of effort to find the fingerprints of mobsters on Wall Street. BusinessWeek found extensive mob involvement during an investigation in 1996.

A three-month investigation by BUSINESS WEEK reveals that substantial elements of the small-cap market have been turned into a veritable Mob franchise, under the very noses of regulators and law enforcement...its chief means of livelihood is ripping off investors by the time-tested method of driving share prices upward--and dumping them on the public through aggressive cold-calling.

The investigation revealed connections to the Russian mob, off-shore bank accounts in the Bahamas, and "increasing levels of violent ''persuasion'' and punishment--threats and beatings" of brokers and traders.

The Mafia made so much money on the stock market in the late 90's that they expanded their operations to other financial industries. Two years ago Attorney General Michael Mukasey told reporters that the mob was a national security threat.

A department assessment of the organized crime threat found such groups "control significant positions in the global energy and strategic materials markets," Mukasey said.

"They are expanding their holdings in these sectors, which corrupts the normal functioning of these markets and may have a destabilizing effect on U.S. geopolitical interests."

In other words, the mob, while still trafficking weapons to terrorists, has gone into the business of commodities. You probably noticed the suspicious spike and fall of oil prices, but you may not have noticed the recently revealed manipulation of the precious metals market.

The Whistleblower

Andrew Maguire is a metals trader in London. He had nothing to gain by contacting the Commodity Futures Trading Commission on February 3rd to alert them about a price manipulation event in the silver market by JP Morgan that would happen in two days. He described the scenario of how it was going to play out.

"It is common knowledge here in London among the metals traders that it is JPM's intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits."

- Andrew Maguire

On February 5, as the metals price smackdown happened exactly as he foretold, he emailed the CFTC and explained to them what was happening in real time. His emails can be seen here.

Six weeks later, when the CFTC began holding hearings to tighten regulations, Maguire became angry that he wasn't invited to testify. So he contacted Bill Murphy from the Gold Anti-Trust Action Committee and gave him his information so he could go public with it.

Not so coincidentally, the very next day after going public, Andrew Maguire and his wife were driving in London when a car sped out of a side street and struck their car. Both Maguire and his wife were injured, but not serious. The car then sped off, nearly running over pedestrians in an attempt to get away.

Is it really any surprise that exactly one day after Maguire went public his life was suddenly in danger? Patrick Byrne might be able to shed some light on that subject.

There's been a lot of joking comments recently about the criminal activity on Wall Street. The term "banksters" has been thrown around a lot.

But is it really a joke?

William Black rails against Wall Street fraud, and with good reason.

But maybe the obvious fraud of Wall Street is just the tip of the iceberg. Maybe the corruption is far more deep and pervasive. Maybe the dividing line between Wall Street financial transactions and organized crime has been blurred to the point of being a national security risk, as Mukasey has said.

Maybe the system is so corrupt that reforms just aren't enough. Maybe we should be approaching Wall Street, not as a dysfunctional industry, but a criminal enterprise.

Wall Street's Joker Up The Sleeve

With all this illegal activity you might think that Wall Street would want to tone it down a bit. For instance, if Vegas got too obvious about the rigging of their games at the casinos the government would crack down.

Wall Street doesn't have to worry about that. When it comes to the financial markets, Wall Street has complete and total regulatory capture.

Wall Street has no reason to fear Washington because Wall Street owns Washington.

All things considered, you would think that Wall Street has all the bases covered.

They own the regulators. They own the financial news media. They own the politicians. But they forgot one thing - the public.

For instance, Wall Street and the talking heads in the financial media has been telling us for decades that free trade would make us all rich. Just ignore all those closed factories. But its hard to ignore the fact that you and your neighbors have lost their jobs and can't get new ones.

Now a majority of Americans view Free Trade as a threat to America. Even Republicans are starting to oppose it.

Which brings us back to the stock market. Remember last May? Economic forecasts were being revised upwards. Most economists said we were in "good shape". Bonddad came back to Daily Kos and proclaimed long-term victory over the doom-and-gloomers. Ironically, Bonddad's victory dance was on the exact same day as Wall Street's Flash Crash. I said double-dip recession, like several other bloggers.

It was right around this time that the "dumb money" decided to not believe the happy talk and stopped investing in the stock market. The overall stock market has dropped about 9% since then.

In fact, so many bloggers remained negative in the face of the economic establishment that an economist at the Federal Reserve said in June that bloggers didn't understand economics.

In July, I warned that the leading indicators were crashing, as did many other blogger. In a call-out diary, Bonddad said the leading indicators were

fine.

Since that time the housing market has literally crashed with all signs pointing downward. The 2nd Quarter GDP was revised down. The unemployment numbers, both monthly and initial claims, were dramatically worse than expected. Regional economic surveys, such as the Philly Fed Index, have disappointed.

The "dumb money" didn't buy into the false hype. The "smart money" did. Now the "smart" money is stuck with these overpriced assets. What does this mean? It means that there is likely to be another Flash Crash in our not so distant future, driven by a lack of liquidity when the dumb money doesn't put a floor under the market, except this time it won't bounce right back.

It won't bounce back until Washington decides to chase the crooks, mobsters, and thieves from Wall Street. The government must save capitalism from itself.