The 5 biggest Wall Street conspiracies

Who really killed Bear Stearns? Did Wall Street create 2008's spike in gas prices? Does Goldman Sachs secretly run everything? Read on and find out.

The Big Money

Once there was a simpler time, when pretty much everything that happened in the financial world had a straightforward explanation.

Take the stock market crash of Oct. 19, 1987. In one day, the market lost more than one-fifth of its value. Back then there was considerable speculation about what had caused the market to decline as much and as fast as it did. Something that most people never had heard of -- before or since -- called "program trading" was widely blamed, and curbs were put in place.

But soon the nation moved on, the market rebounded, and the issue faded. Discussion of the causes of the crash was confined to presidential commissions and academics.

Today, of course, the market crash of 1987 seems like a happy interlude in comparison with the recent nightmare. With greater fear, reminiscent almost of the Red Scare of the 1950s, we're seeing a rash of conspiracy theories.

It's not surprising, really. In his 1963 book of essays, "The Paranoid Style in American Politics," Richard Hofstadter marveled at the extent to which paranoia had become an accepted part of the political dialogue. So it seems natural that paranoia has crept into the dialogue about the financial system as well.

As in all fields of conspiracy theorizing, there are two broad species of Wall Street conspiracy theories:

• Alternate history. One must not accept what they want you to believe. It's far too easy, for example, to accept what they want you to think about Sept. 11, the Holocaust and the JFK assassination. The truth they don't want you to know, according to these theories, is that the collapse of the World Trade Center was a controlled demolition, that the Holocaust didn't happen and that Lee Harvey Oswald was a patsy.
• Hidden factors. Something is really happening, and it's all being hushed up. That includes Area 51, the Trilateral Commission and a Masonic conspiracy.

But it's not cut and dried. Maybe the CIA's agents didn't kill President John F. Kennedy, but other outlandish-sounding stories about the CIA turned out to be true. Time -- sometimes a long time -- can demolish or substantiate conspiracy theories.

So here's a field guide to the five most prevalent Wall Street conspiracy theories, with each one graded on scope, durability, crowd appeal and plausibility, and each graded on a sliding scale from 1 to 5, with 1 being "fuhgeddaboudit" and 5 being "damn right."

1. The Plunge Protection Team manipulates the markets

This is a classic conspiracy theory because it is grounded in fact. Yes, there really is a Plunge Protection Team, though it doesn't go by that name. As revealed in a much-quoted Washington Post article from February 1997, the president's Working Group on Financial Markets is poised to intervene in the event of a market calamity. "Plunge Protection Team" was coined by the Post, and it stuck.

The article spawned a spasm of conspiracy theories that grind on to the current day, holding that the government actually does secretly intervene in the markets, buying equity index futures or, as Rep. Ron Paul, R-Texas, recently asserted, has sought to depress the price of gold. But most of the braying about the PPT has been based on snippets of comments by public officials, and the actual evidence has been pretty much absent.

Category: Hidden factor

Scope: 4

Durability: 4

Crowd appeal: 3

Plausibility: 1

2. Wall Street screws consumers at the gas pumps

Wall Street speculation that drives up prices rarely gets the public too stirred up -- if the prices belong to stocks they've bought. But speculation that drives up the price of gasoline, heating oil, broiler chickens and other commodities has consumers ready to march down from Trinity Church carrying pitchforks.

So it was with the oil price spike of 2008. Surely there was a hidden hand there, no? After all, how was it that oil prices suddenly climbed? Didn't make sense. Had to be nasty people on Wall Street doing that.

Well, guess what? That's exactly what happened. The Commodity Futures Trading Commission found that speculators had driven up the price of oil. So here's a clear-cut example of how traders sitting behind terminals actually did screw ordinary people on the proverbial Main Street. That wasn't their intent, but that's what they did.

Category: Hidden factor

Scope: 5

Durability: 3

Crowd appeal: 5

Plausibility: 5

3. Goldman Sachs is a giant vampire squid

Rolling Stone writer Matt Taibbi seemed to touch a raw nerve in the yammering classes with his July 2009 article on the breadth of Goldman Sachs' influence in Washington, on Wall Street and everywhere else. Goldman Sachs, as described by Taibbi, was a "giant vampire squid wrapped around the face of humanity."

It wasn't the most precise metaphor (vampire squids are tiny deep-sea creatures that rarely encounter human faces), but the general thrust of his piece was correct.

Goldman does have a way of coming out on top in every bad situation. Taibbi didn't mention it, but Goldman was instrumental in ousting New York Stock Exchange CEO Richard Grasso when he proved to be an embarrassment.

The weakness of Taibbi's case against Goldman is that it relies on overstatement, such as the claim that Goldman had "engineered every major market manipulation since the Great Depression." But his essential point is right: Goldman did have a key role in the mortgage-derivatives fiasco, and its tentacles have spread through government for eons.

It's a classic case of overconcentration of power. And if you don't believe me, just ask Adam Storch, the 29-year-old ex-Goldman executive who just became the chief operating officer of the Securities and Exchange Commission's enforcement division. I'd have given this conspiracy theory a "3" on the plausibility scale, but young Storch's arrival at the SEC warrants another notch.

Maybe vampire squids really do rise to the surface?

Category: Alternate history

Scope: 5

Durability: 3

Crowd Appeal: 5

Plausibility: 4

4. Tim Geithner is in the pocket of the big bankers

I debated whether to even include this in the list of conspiracy theories because the evidence for it is so overwhelming. There's no question that Tim Geithner likes to talk to people who run major financial institutions, and this was known long before e-mails were released showing that as Treasury secretary his telephone buddies included all the major CEOs of the big banks.

That was the case as well when Geithner was the president of the New York Federal Reserve Bank. No secret about it. The bankers freely admitted they chatted it up with Geithner. One can argue that there's nothing wrong with this, that it's not at all surprising for a financial neophyte to lean on people at, for instance, the aforementioned Goldman Sachs -- particularly when it employs one of Geithner's predecessors at the New York Fed, his confidant E. Gerald Corrigan.

The price of getting all this terrific expertise is that it makes you seem beholden to the people from whom you're getting all this terrific expertise, and so it is with Geithner. Though it isn't kind to say that Geithner is in the pocket of Wall Street, there's a bit too much lint flying around to ignore.

Category: Hidden factors

Scope: 2

Durability: 5

Crowd Appeal: 3

Plausibility: 5

5. Naked short-selling killed Bear Stearns and Lehman

The accepted history of the death of Bear Stearns and Lehman Brothers is that the two were victims of their own doing -- resulting from incompetence and sheer, squalid, leverage-fueled greed -- and that their companies collapsed as a result. You can believe that the CEOs of the two banks were responsible, or you can believe their excuses, which are remarkably similar.

In their appearances before congressional committees, Alan Schwartz of Bear Stearns and Dick Fuld of Lehman both blamed speculators, rumormongers and naked short-sellers for torpedoing their companies. Their own actions, they say, were flawless. Naked shorters -- these are people who short-sell stocks without borrowing the shares -- are said to have piled on as Bear and the Lehman were teetering and ground their stock prices into dust. Conspiracy theorists agree and are saying that the two companies were "destroyed" by naked shorting.

One advocate of this position is the aforementioned Taibbi. In a Rolling Stone article titled "Wall Street's naked swindle," Taibbi argued that Bear Stearns was "eaten by predators" and that "virtually the same scenario repeated itself in the case of Lehman Brothers." Both, he said, were "vaporized in an obvious case of market manipulation" -- naked shorting.

Christopher Cox, then the chairman of the SEC, didn't help this alternate history of the financial crisis when he said in July 2008 that there was no "unbridled naked short selling of financial issues." It was completely debunked in a little-noticed academic study, conducted in May 2009 at the University of Oklahoma (.pdf file), that examined the same trading data cited by the conspiracy theorists. It found that there was "no evidence that stock price declines were caused by naked shorting." Any naked shorting, researchers said, took place after the two companies' stocks crashed.

It's been more than a year since the two companies bit the dust, and so far there hasn't been a prosecution of a single supposed Bear or Lehman bear raider. So you can believe that Schwartz and Fuld aren't responsible for the collapse of their companies and that the SEC is deliberately refusing to cover itself in glory by nabbing the miscreants -- or you can believe that nobody has been nailed for naked shorting their stocks into oblivion because there's no one to nail.

Category: Alternate history

Scope: 4

Durability: 5

Crowd Appeal: 4

Plausibility: 1

This article was written by Gary Weiss for The Big Money.