03 June 2013

NAV Premiums of Certain Precious Metal Trusts and Funds - Chasing Madoff, Chasing Metals

"The dissenter is every human being at those moments of his life when he resigns momentarily from the herd and thinks for himself."

Archibald Macleish

I had the opportunity to watch the documentary Chasing Madoff yesterday.

It is largely about how Harry Markopolos and his two associates discovered the likelihood of fraud in the Madoff fund, and their decade long battle to bring that fraud to light.

I do recommend you see it if you can.

What is most important, what everyone seems to be missing, is that Bernie Madoff was not some mad genius acting in secrecy through his cleverness. The dodgy nature of his fund was known by many hundreds of firms on the Street, and most anyone with a decent level of financial sophistication could readily see that something was wrong with his business model and returns.

Indeed, one could not see his scheme for the most part by willfully not looking at it, which is the course that the SEC took.

The scheme 'worked' for so long because Madoff let his enablers, the Street and the feeder funds, take the bulk of the fees from unwitting investors. So quite a few of the people who should have known were caught in a credibility trap. To expose Madoff would involve some risk for themselves, and to say nothing and plead ignorance was lucrative.

As for the media, Markopolos had written and gift-wrapped the story, made a list of witnesses, and mailed it to the Wall Street Journal years before the scheme was exposed. And it was killed from above. It wasn't until Madoff publicly confessed that the media responded, and then it was with spectacle rather than insight.

As for the SEC, although a few people were forced to resign, not one person involved was prosecuted. As has recently come out from a determined whistle-blower little mentioned in the press, it was a top down policy decision not to pursue any corruption in the investment management industry that caused the SEC to ignore this vast criminal conspiracy during the first decade of 2000.

And the irony is that even the work of Harry Markopolos did not lead to Madoff's downfall. The market panic in 2007 caused a run for liquidity, and at that point Madoff's scheme fell apart of its own weight. Madoff himself was able to plan his own confession, and make whatever provisions he wished beforehand as far as records and evidence.

In court he 'copped a plea' and was sentenced to 150 years, but did not speak, did not implicate anyone else.

There is a strong suggestion that very powerful and well connected people were involved in this, and that if he had taken some other course of action, Madoff would have been a dead man.  This occurred before as the documentary shows, including the silencing of witnesses.

The plutocrats would like us to think that Madoff was just a clever rogue trader, some outsider.  That the SEC were just lawyers incompetent in finance.  That the press was too preoccupied with other things to investigate.  And Markopolos was an obsessive oddball who happened to get it right.  What happened was an anomaly.  The system is secure.

This documentary reminded me very much of the precious metals market, although as a global market  it is on a much grander scale. If so, I think that there is a good possibility that things will play out in the same way.   Do I think this is some tortured analogy?  Do you think that prices falling in the face of rising demand, stubborn secrecy, and numbers that never add up over a long period of time make sense?  Good luck with that.

The regulators will keep stonewalling.  The scheme to sell paper gold and silver, essentially the same bullion many times over, will go on until some event forces a run on supply, and then the scheme will collapse.  It is both embarrassing and lucrative.  It is all carrot and little stick.  And so frauds like this can continue on for a long, long time.

I think we should remember that despite all the histrionics in the Congress, and the fine talk of reform from the new president Obama, little to nothing has changed in the US financial industry. The same environment of compliant conspiracy to gain huge sums of easy money through a pathological criminality exists today.   There are few investigations and even fewer prosecutions.

I think we have had our wake up calls several times, in the collapse of MF Global and what followed, the widespread rigging of the key LIBOR interest rate, and most recently in the odd market divergences between paper and reality. It is hard to believe these things when they happen, unless you understand what lies underneath them. 

Take this for what it is worth.  As the story Chasing Madoff says, because you see figures on a piece of paper, that does not necessarily mean that there is anything behind them.  And when the scheme unravels, events move quickly.  And many people are ruined, and no one seems to care.

Their hypocrisy knows no bounds, their willingness to hide the truth no limit. They do it to protect themselves, and 'the system' that serves them.   One has to wonder how far it can go, and what happens when it can't.

There is a sad story in Chasing Madoff about a smart young man named Abe, whose father-in-law had a huge sum of money with the Madoff fund.  Harry Markopolos handed over the evidence to him, and he showed it to his father-in-law.  After the Madoff scandal became public, Abe called Harry Markopolos' associate and thanked him for what he did.  He lost everything, because despite the evidence, his father-in-law could not believe that there could be a lie so huge for so long, and that Bernie, whom he had known for years, would cheat him.

I do think that the precious metals markets and a good part of the banking system today are such a scheme.  And when something happens to break such a scheme, prices will adjust rather suddenly.  I do expect a profound cover-up and a declaration of force majeure on some pretext. 

There may even be some move to make people do something that they do not wish to do, such as hand over their metal in storage, which is not there anyway, or bail-in their bank deposits, or turn in their dollars for new dollars, at a rate of about 100 to 1.  Or just take a big loss and shut up.  Or something even harder to imagine.  What limits are there to madness?

And then we will see what happens next. But I do not believe for one minute that this is over.  To the contrary, I think we have only just begun.  There will be no sustainable recovery without significant reform.  Whether it is austerity or stimulus makes little difference when you are caught in a Ponzi scheme, and living a lie. There is no other option than increased transparency and reform.

Whatever wealth is provided goes to the top, and to continue to support the scheme.  And the urge from the plutocrats and their enablers will be to silence the dissenters, and lash out at the weak, at the defenseless, and finally at the other.  And if taken, history shows, almost without fail,  that this is a Faustian bargain, a mariage de convenance with evil. And that madness serves only itself.

"I believe we have a crisis of values that is extremely deep, because the regulations and the legal structured need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I'm going to put it very bluntly. I regard the moral environment as pathological. And I'm talking about the human interactions that I have. I've not seen anything like this, not felt it so palpably.

These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes, they have no responsibility to their clients, they have no responsibility to people... counterparties in transactions. They are tough, greedy, aggressive, and feel absolutely out of control, in a quite literal sense. And they have gamed the system to a remarkable extent and they have a docile president, a docile White House and a docile regulatory system that absolutely can't find its voice. It's terrified of these companies.

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I'm afraid to say... both parties are up to their necks in this.

... But what it's led to is this sense of impunity that is really stunning and you feel it on the individual level right now. And it's very, very unhealthy.   I have waited for four years... five years now to see one figure on Wall Street speak in a moral language. And I've have not seen it once. And that is shocking to me. And if they won't, I've waited for a judge, for our president, for somebody, and it hasn't happened. And by the way it's not going to happen any time soon, it seems.

Jeffrey Sachs