Max Keiser Interviews Francine McKenna On JP Morgan and MF Global

"In this respect England exhibits the most remarkable phaenomenon in the universe in the contrast between the profligacy of its government and the probity of its citizens. And accordingly it is now exhibiting an example of the truth of the maxim that virtue & interest are inseparable.

It ends, as might have been expected, in the ruin of its people, but this ruin will fall heaviest, as it ought to fall, on that hereditary aristocracy which has for generations been preparing the catastrophe.

I hope we shall take warning from the example and crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country."

Thomas Jefferson, November 12, 1816

Source

Francine McKenna's site re: The Auditors

CFTC Commissioner Bart Chilton On the Irony of JP Morgan's Trading Loss

"Financial institutions such as JPMorgan love to buy derivatives because they are opaque, create fictional income that leads to real bonuses and when (not if) they suffer losses so large that they would cause the bank to fail, they will be bailed out."

William K Black

When the next financial crisis occurs remember the things that Bart Chilton says in his op-ed piece below. Things like widespread bank fraud and a financial collapse do not just happen. Sandy Weill led a determined and well funded lobbying effort to overturn Glass-Steagall and open the public pocketbook for the banks. And his protege Jamie Dimon continues on with his work, with a lobbying effort and use of the courts to circumvent the return of sensible banking reform.

But this would not have been possible without the lapse in the stewardship of public figures in the Congress, the Executive Office, and private institutions like the media and the Federal Reserve.

The breadth of the fraud makes reform difficult, because the money flowing from the symbiotic relationship between the monied interests and Washington is a highly addictive drug to those for whom money brings power.

But reform will happen. It is just a matter of how bad it has to get before change comes.  The more the resistance, the more sweeping and powerful will be the change.    Corruption never lasts; even the great empires of history, so intimidating and seemingly insurmountable at the height of their power, have fallen.  

And so surely will a few recklessly selfish bankers, with their political hacks and corrupt enablers, fall in disgrace and eventually be forgotten, or if remembered, only as a warning, a tarnished stain on the enduring Republic of free people.

See also: How JPMorgan Is Like Enron

McClatchy
JPMorgan: Isn't life strange?
By BART CHILTON
May 17, 2012

By now, folks have heard much about the announcement that JPMorgan Chase had somehow lost $2 billion over a six-week period. In an irony of ironies, here's what one JPMorgan risk officer had to say about the behemoth bank just a few months ago: "Our metric of success is 'no surprises'; no surprises in terms of the impact on the firm of any individual behavior or outside event."

Hmm. Actually there was good reason to say that at the time as JP had just been named Risk Magazine's "Derivatives House of the Year." As the Moody Blues sing: "Isn't Life Strange?"

Here's a little perspective: $2 billion represents 10 percent of JPMorgan's profits for all of last year. In fact, $2 billion is more than four times the amount the U.S. government prints in one day. And, $2 billion over six weeks is more than $47 million a day!

None of this means we're going to have a repeat of the colossal calamity of 2008. But, it's scary isn't it? The "scary smart," "greed is good," "regulations are bad" folks on Wall Street may be flying below the clouds today.

But think about why. Here we are four years after the collapse of Bear Stearns, Lehman Brothers and AIG, and we're still working toward implementing the rules that Congress and the president put in place to keep another 2008 from happening, i.e. the Dodd-Frank Financial Reform and Consumer Protection Act.

The act itself has been around almost two years and yet, of the roughly 300 rules and regulations, less than a third have been completed - and that's 10 months after the mandated deadline. The JPMorgan announcement reminds us that our financial markets remain susceptible to the impact and contagion of these major market players. Maybe it's just the java jolt we need to wake folks up.


Lots of things have slowed the rulemaking process, not the least of which are lawsuits brought against regulators by the scary smart people. Remember, to some of them, regulation is a dirty word. Then there are those in Congress who never wanted financial reforms in the first place and are either trying to repeal them a piece at a time; drown regulators in their own version of red tape; or just hold back funding to the watchdogs who would keep an eye on the JPs of the world.

Four years ago, the economy was on the verge of collapse for two reasons: the high-flying, above the clouds captains of Wall Street and lax regulation. Is history repeating itself? I hope not and I don't think so, but scary it is.

Are we more secure now than we were when the economy collapsed? To some extent, yes. There's new transparency in markets that will allow us to see the kinds of things JP was doing to lose $47 million a day. But, could our markets suffer significantly before all the rules are in place? Unfortunately, yes. And that's bad for investors, markets, and yes, consumers. To quote the same JPMorgan official, "Investors love not being surprised." Isn't life strange, indeed?

Bill Moyers Interviews Simon Johnson on JP Morgan Chase and the Next Financial Crisis

“The signs that I see, the body language, the words, the op-eds, the testimony, the way these bankers are treated by certain congressional committees, it makes me feel very worried. I have a feeling in my stomach that is what I had in other countries, much poorer countries, countries that were headed into really difficult economic situations. When there’s a small group of people who got you into a disaster and who are still powerful, you know you need to come in and break that power and you can’t. You’re stuck.”

Simon Johnson


"Financial institutions such as JPMorgan love to buy derivatives because they are opaque, create fictional income that leads to real bonuses and when (not if) they suffer losses so large that they would cause the bank to fail, they will be bailed out."

William K. Black

Are JPMorgan’s Losses A Canary in a Coal Mine?
By Bill Moyers
May 16, 2012

That sound of shattered glass you’ve been hearing is the iconic portrait of Jamie Dimon splintering as it hits the floor of JPMorgan Chase. As the Good Book says, “Pride goeth before a fall,” and the sleek silver-haired, too-smart-for-his-own-good CEO of America’s largest bank has been turning every television show within reach into a confessional booth.

Barack Obama’s favorite banker faces losses of $2 billion and possibly more – all because of the complex, now-you-see-it-now-you-don’t trading in exotic financial instruments that he has so ardently lobbied Congress not to regulate.

Source

See also: Senate Banking Chairman Calls Jamie Dimon to Testify, But JPM Is His Largest Contributor!

Corzine Syndrome: JPM's Stealth Prop Trading Unit Was Crafted for Risky Profit and Reported Directly To Jamie Dimon

I want to put a spike in all this spin around the CEO defense, that poor Jamie could not have possibly known what was going on in London because the company was so large, and he is such a busy man. Sarbanes-Oxley was designed to put a stop to that lame excuse touted out by defense lawyers and apologists in the media every time something like this happens.

The CIO operation was transformed under Jamie's direction as a dodge to the impending Volcker Rule, set to take effect in July, that prohibited this kind of risky prop trading by institutions backed with deposit insured money and both explicit and de facto government guarantees.

He wanted it up to be what it was, an opaque profit center.   It probably sounded like a good idea, taking a risk hedging and reduction function and turning it in to a profit center.   Because of the accounting differential between the CIO and the portfolios it was alleged to hedge,  one could take profits and not realize losses in a quarter, which provided a nice billion dollar cushion for earnings.   Every industry has their accounting dodges like this that allow a company to 'manage earnings.'  In tech it is in acquisition accounting and inventory writedowns.

But in their clumsy piggishness, the JPM CIO traders took their usual overly large and manipulative positions, as they have done in other markets, masquerading as hedges. But this particular credit market was too narrow and specialized, and they stepped on the toes of savvy market insiders.  And it blew up in their faces.

When the media called Jamie on it a few months ago, after traders complained that 'the London Whale' was rigging market prices, he called it a legitimate hedging operation and dismissed it as 'not a problem.'

The same thing is going on in other markets as well, even now, and on a much larger scale with larger positions and more leverage. The difference is that it is smaller traders and the public that are being hurt, while much of the risk is being misrepresented and unrealized, for now.

And so the regulators are sitting on their hands and doing nothing about it because they are being discouraged from taking action by powerful interests in the Administration and the Congress.   JPM has long been known as the government's 'go to guy' when something needs to be done to unofficially intervene in markets.

Remember, it was pressure from the Geithner Treasury and the Fed at the behest of JPM that created the loophole that would have permitted the CIO unit to continue to function as a prop trading unit even after the Volcker Rule supposedly shut such risky ventures down.

And they are afraid of what will happen to JPM if these market positions, particularly in the derivatives and metals markets, are exposed for what they really are, and their own involvement in allowing it to happen for so long.  That is the credibility trap, and the reason for the remarkable lack of investigation and prosecution of financial fraud.

International Financing Review
JP Morgan investment unit played by different high-risk rules
16 May 2012

The JP Morgan Chase unit that lost more than US$2 billion through a failed hedging strategy had looser risk controls than the rest of the bank, according to people familiar with the situation.

The risk of losses is tallied by the bank using a so-called value at risk (VaR) calculation. However, the Chief Investment Office, the unit responsible for the high-profile loss that JP Morgan disclosed last Thursday, had a separate VaR system.

It used a less stringent calculation that gave a lower risk assessment of its trades, according to people who previously worked at the bank.

The unit also reported directly to CEO Jamie Dimon, a factor which allowed it to maintain a separate risk monitoring set-up to other parts of the investment bank, these people said.

“It was very large, but was never very transparent, and it wasn’t clear that they had an appropriate funding cost,” said the source with direct knowledge of the CIO. “They were running more risk than the investment bank – and with no peer review process (from those in the investment bank).”

Despite repeated warnings from executives inside the firm as long ago as 2005, the CIO unit remained notably free from oversight.

A source with knowledge of the situation said that these warnings included the size of the CIO, the fact that its risk reporting was not transparent and the scope for the unit to get “bigger and bigger” because it had a lower cost of funding than the rest of the investment bank.

Until April, the CIO unit’s unusual autonomy allowed it to build up risky positions without triggering alarms.

Indeed, the unit was encouraged to be a profit center, as well as hedging against risk, a source with direct knowledge of the unit said. Ina Drew, who headed the unit, earned more than US$15 million in each of the past two years, making her among the highest-paid executives at the bank and one of the most compensated women on Wall Street.

Drew could not be reached for comment... (Did you check under the bus? That is where masters-of-the-universe like Corzine and Dimon throw the ladies when they are done using them to establish plausible deniability. - Jesse)

Read the rest here.

Max Keiser Interviews Nomi Prins on JPM and Derivatives Bets

Nomi Prins: On JPM, the Whale Man, and Glass-Steagall

This is one of the better commentaries on JPM and the history and imperatives of banking regulation that I have seen recently.

I do not wish to beat this to death, but I have read too many glib economist and stock tout comments sloughing this off as 'no big deal.' Not surprisingly, these were many of the same people who said similar things during the build up of the credit bubble and the financialization of the real economy.

And I also expected something like this to happen in the derivatives markets, following the thefts of customer money at MF Global.  It just happened a little sooner than I had imagined.  Things are progressing quickly.

JPM Chase Chairman, Jamie Dimon, the Whale Man, and Glass-Steagall
By Nomi Prins
May 11, 2012

It was fitting that while President Obama and his Hollywood apostles broke fundraising records at a sumptuous $40,000 per plate dinner at George Clooney’s place, word of JPM Chase’s ‘mistake’ rippled through the news. Not long ago, Dimon’s name was batted about to become Treasury Secretary. But as lines are drawn and pundits take sides in the Jamie Dimon ego deflation saga – or, as I see it - why big banks should be made smaller and then, broken up into commercial vs. speculative components ala Glass Steagall – it’s important to look beyond the size of the $2 billion dollar (and counting) beached whale of a trading loss.

Yes, $2 billion in the scheme of JPM Chase’s book and quarterly earnings is tiny, a ‘trading blip’ as it’s been called by some business press. But that’s not a mitigating factor in what it represents. In this era dominated by a few consolidated and complex banks, the very fact that it’s a relatively small loss IS the red flag.

First - because the loss could (and will) grow. Second, because even if it doesn’t, it’s a blatant example of a big bank incurring un-due risk within a barely regulated, highly correlated financial markets. It only takes another Paulson hedge fund, or a trading desk at Goldman Sachs, to short the hell out of the corporates that JPM Chase is synthetically long, or take whatever the other side really is, to create a liquidity crisis that will further screw those least able to access credit – individuals, small businesses, and productive capital users.

We know this. We’ve seen this. We're in this. There’s no such thing as an isolated trading loss anymore. And yet Jamie Dimon, seated atop the most powerful bank in the world, has smugly led the charge to adamantly oppose any moves to alter the banking framework that allows him, or any bank, to call a bet - a hedge or client position or market-making maneuver - with central bank, government official, and regulatory impunity.

Flashback to the unimaginable in 1933

It’s 1933 and the country has undergone several years of painful Depression following the 1920s speculation that crashed in the fall of 1929. Investigations into the bank related causes began under Republican President, Herbert Hoover and continued under Democratic President, FDR...

Read the rest here.

Partnoy's Complaint: Lawmakers Must Heed the Wisdom of the 1930s

Here is Frank Partnoy's prescription for financial reform. Essentially he says that half measures are not sufficient. Wall Street will always find loopholes in weak regulation, and they have plenty of help in this in the halls of power in Washington, and in the think tanks, universities and the media. 

Even President Obama seems to be in denial about the effectiveness of his reforms, and the health of the US banking system. Obama: JPM One of the Best Managed Banks His own Treasury pressured regulators and lawmakers to create the loophole that allowed the loss in London, and that his administration has a horrible record in investigating and prosecuting bank fraud.

I do not think the US is ready to insist on serious reform. It will take another crisis.   The anti-regulatory slogans are too effectively ingrained in the public psyche. And self-deception is a powerfully addictive state of mind. Especially for those whose expansive lifestyles depend on it.

Financial Times
Rebuild the Pillars of 1930s Wall Street
By Frank Partnoy
May 13, 2012

...JPMorgan’s losses have generated renewed interest in tightening the “Volcker rule”, which would attempt to ban speculative trading by banks. Yet the losses also illustrate why the Volcker rule will not work. The synthetic credit trades were not proprietary bets; they were massive, mismatched hedges. (Well they were prop bets but were masquerading as hedges. But that merely underscores the problem with the Volcker Rule and regulating specific guidelines that can be circumvented by pathological liar as Mr Partnoy indicates in the next paragraph. - Jesse)

The current version of the rule arguably would not have barred these trades (It would have, except for the hedging loophole that JPM had obtained with the assistance of the Fed and the Treasury - Jesse). Moreover, wherever the line between speculating and hedging is drawn, Wall Street will easily find a way to step over it. It would be impossible for regulators to police what is a hedge and what is not.

A better way to stop the cycle of financial fiascos would be to emulate 1930s reforms, when Congress erected twin pillars of financial regulation that supported fair, well-functioning markets for five decades. First was a mandate that banks disclose important financial information. In today’s complex terms, that would mean disclosing not just a value-at-risk number but also worst-case scenarios. The law should require JPMorgan to tell investors what would cause a $2bn loss.

The second pillar was a robust anti-fraud regime that punished officials who did not tell the full truth. Unfortunately, this has been eroded by legislation and judicial decisions that make it more difficult for shareholders to allege fraud. Prosecutors are also reluctant to bring criminal cases, leaving the Securities and Exchange Commission to mount largely toothless civil actions. Instead, the law should punish anyone who defrauds investors by citing one value-at-risk number and then losing 30 times that amount.

By rebuilding these two pillars, regulators could create stronger markets and greater trust. At a minimum, they could wean bank managers, and themselves, off flawed maths. They could stop allowing banks to satisfy disclosure obligations simply by reporting one inevitably inaccurate value-at-risk number. They could give Mr Dimon more than a slap...

Read the entire article from the Financial Times here.

Carl Levin On JPM's Exploitation of the Loophole Which the Fed and Treasury Helped to Create

Carl Levin does a good job of bringing the discussion back on point again and again.

Tavakoli: JPMorgan May Be a Trading Accident Waiting To Happen

I think the next financial crisis is less than two years away, and it will strike the global real economy as badly as the banking crisis with the collapse of Lehman Brothers.

Jamie Dimon's SNAFU: JPMorgan's Other Derivatives' Losses
By Janet Tavakoli
05/12/2012

In an August 2010 commentary about JPMorgan's losses in coal trades I wrote: "The commodities division isn't the only area in which JPMorgan is vulnerable. Credit derivatives, interest rate derivatives, and currency trading are vulnerable to leveraged hidden bets. Ambitious managers strive to pump speculative earnings from zero to hero."

At issue is corporate governance at JPMorgan and the ability of its CEO, Jamie Dimon, to manage its risk. It's reasonable to ask whether any CEO can manage the risks of a bank this size, but the questions surrounding Jamie Dimon's management are more targeted than that. The problem Jamie Dimon has is that JPMorgan lost control in multiple areas. Each time a new problem becomes public, it is revealed that management controls weren't adequate in the first place.

JPMorgan's Derivatives Blow Up Again

Jamie Dimon's problem as Chairman and CEO--his dual role raises further questions about JPMorgan's corporate governance---is that just two years ago derivatives trades were out of control in his commodities division. JPMorgan's short coal position was over sized relative to the global coal market. JPMorgan put this position on while the U.S. is at war. It was not a customer trade; the purpose was to make money for JPMorgan. Although coal isn't a strategic commodity, one should question why the bank was so reckless.

After trading hours on Thursday of this week, Jamie Dimon held a conference call about $2 billion in mark-to-market losses in credit derivatives (so far) generated by the Chief Investment Office, the bank's "investment" book. He admitted:

"In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored."


But lets get back to commodities. For several years, legendary investor Jim Rogers has expressed his concern to me about JPMorgan's balance sheet, credit card division, and his belief that Blythe Masters, the head of JPMorgan's commodities area, knows so little about commodities. Jim Rogers is an expert in commodities and is the creator or the Rogers International Commodities Index. He also sells out-of-the-money calls on JPMorgan stock. So far, that strategy has worked out well for him. (Rogers gave me permission to publicly reflect his views and his trades.) Moreover, JPMorgan is still grappling with potential legal liabilities related to the mortgage crisis.

Is Jim Rogers justified in his harsh view of JPMorgan's commodities division? After he expressed his concerns, JPMorgan's coal trade made the news, and it appeared to me that Jim Rogers is on to something. For those of you who missed it the first time, my August 9, 2010 commentary is reproduced below in its entirety. Dawn Kopecki at Bloomberg/BusinessWeek broke the story wherein Blythe Masters' quotes first appeared...

Read the rest here.

JPMorgan Used Political Influence With Fed and Treasury to Create London Loss Loophole In Volcker Rule

"It is impossible to calculate the moral mischief, if I may so express it, that mental lying has produced in society. When a man has so far corrupted and prostituted the chastity of his mind as to subscribe his professional belief to things he does not believe, he has prepared himself for the commission of every other crime."

Thomas Paine

Using political influence with the Fed and the Treasury, JP Morgan overrode concerns at the SEC and CFTC to create a broad loophole in the Volcker Rule which was designed to allow them to continue risky and highly leveraged 'prop trading' in their CIO unit under the phony rationale of 'portfolio hedging.'   This is the backstory on the antics of the 'London Whale' and quite likely their rationale of 'hedging' to justify enormous and manipulative positions in other markets.

Throughout the lead up to the financial crisis, banking lobbyists used their friends at the Fed and the Treasury to suppress the warnings of regulators and undermine reforms to protect the public interest.

One of the most infamous instances was the bullying of Brooksley Born and the silencing of her warning as chairman of the CFTC by Alan Greenspan, Robert Rubin, and Larry Summers.   PBS Frontline: The Warning.

This crony capitalism is one of the reasons why the financial system collapsed, and why the markets are still so dangerously unstable, despite the determined efforts to disguise it with liquidity and lax regulation. The responsibility for this goes back to the Clinton and Bush Administrations at least.

Obama was elected with a mandate to reform, but instead packed his Administration with Wall Street figures. He has one of the worst records for pursuing financial frauds in the last twenty years.

It is time to stop apologizing for and tolerating the soft corruption that has characterized the Obama Administration's policy on the financial sector since day one. The price of giving him a pass on this failure to do his job and making excuses for him is too high.    The excuse that Romney will be worse is not acceptable.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.

NY Times
JPMorgan Sought Loophole on Risky Trading
By Edward Wyatt
May 12, 2012

WASHINGTON — Soon after lawmakers finished work on the nation’s new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank.

Several visits over months by the bank’s well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking.

Even after the official draft of the Volcker Rule regulations was released last October, JPMorgan and other banks continued their full-court press to avoid limits.

In early February, a group of JPMorgan executives met with Federal Reserve officials and warned that anything but a loose interpretation of the trading ban would hurt the bank’s hedging activities, according to a person with knowledge of the meeting. In the past, the bank argued that it needed to hedge risk stemming from its large retail banking business, but it has also said that it supported portions of the Volcker Rule.

In the February meeting was Ina Drew, the head of JPMorgan’s chief investment office, the unit that suffered the $2 billion loss...

JPMorgan wasn’t the only large institution making a special plea, but it stood out because of Mr. Dimon’s prominence as a skilled Washington operator and because of his bank’s nearly unblemished record during the financial crisis.

“JPMorgan was the one that made the strongest arguments to allow hedging, and specifically to allow this type of portfolio hedging,” said a former Treasury official who was present during the Dodd-Frank debates.

Those efforts produced “a big enough loophole that a Mack truck could drive right through it,” Senator Carl Levin, the Michigan Democrat who co-wrote the legislation that led to the Volcker Rule, said Friday after the disclosure of the JPMorgan loss.

The loophole is known as portfolio hedging, a strategy that essentially allows banks to view an investment portfolio as a whole and take actions to offset the risks of the entire portfolio. That contrasts with the traditional definition of hedging, which matches an individual security or trading position with an inversely related investment — so when one goes up, the other goes down.

Portfolio hedging “is a license to do pretty much anything,” Mr. Levin said. He and Senator Jeff Merkley, an Oregon Democrat who worked on the law with Mr. Levin, sent a letter to regulators in February, making clear that hedging on that scale was not their intention.

“There is no statutory basis to support the proposed portfolio hedging language,” they wrote, “nor is there anything in the legislative history to suggest that it should be allowed.”

While the banks lobbied furiously, they were in some ways pushing on an open door. Officials at the Treasury Department and the Federal Reserve, the main overseer of the banks, as well as the Comptroller of the Currency, also wanted a loose set of restrictions, according to people who took part in the drafting of the Volcker Rule who spoke on the condition of anonymity because no regulatory agencies would officially talk about the rule on Friday.

The Fed and the Treasury’s views prevailed in the face of opposition from both the Securities and Exchange Commission and the Commodity Futures Trading Commission, which regulate markets and companies’ reporting of their financial positions. Both commissions and the Federal Deposit Insurance Corporation, which insures bank deposits, pushed for tighter restrictions, the people said...

Read the rest here.

ETFs Part 2: The Next MF Global or Trigger For a Broader Collapse - But Timing Is Everything

It is the introduction of synthetic derivatives in place of actual holdings, and the abuse of counterparty exposure with one's own organization thereby concentrating risk, that start to make these financial creatures look even more deadly, and more like control frauds, than one might have previously imagined.

I think that when one of these constructions fails, as one must almost surely do, we will then have either an MF Global moment, wherein one institution goes down and quite a few customers find that they are holding worthless paper instead of assets, or even worse, an enmeshed counterparty risk triggers another Lehman-like freeze in the credit markets and, as the dominos fall, a new financial crisis even worse than the last.

The nastier version would almost certainly occur if the failure and subsequent disclosure of fraud occurs in some commodity ETF. Why?

In that instance it is more difficult and much more noticeable, although not impossible, for the Congress and the Fed to throw loads public money, and subvert justice, to make the problem and full disclosure of fraud to go away.

Stocks and bonds are relatively easy to counterfeit; physical commodities take a little more energy, boldness, and imagination, the challenge of the shell game rather than the relatively mechanical process of inflating the world's reserve currency on behalf of financial friends with benefits.

So before you short stocks in your trading account, with abandon and quite possibly into insolvency, keep in mind that the Fed is perfectly capable of fomenting another bubble to save the status quo, as they did in 2002-2007. To underestimate the corruptibility of the Fed and the government in partnership with the banks and their corporations can be a costly lesson indeed.

ETFs – Part 2

By Golem XIV on May 4, 2012

So far so vanilla. Now lets look at how, as the ETF market has grown, the clever boys and girls of finance have found ‘innovative’ ways of pumping those ETFs up a bit, just like they did to Securities.
Use of Derivatives in ‘Synthetic’ ETFs

The main innovation in ETFs has been the creation of what are called ‘synthetic’ ETFs which instead of actually buying or even borrowing a basket of shares, use derivatives to track the value of the underlying market without the need to match its composition. Instead the Synthetic ETF enters into an asset swap agreement with a counterparty using an over-the-counter (OTC) Derivative. Before explaining what the heck that means let’s just look at how quickly the Synthetic market has grown.
Synthetic ETFs have grown very rapidly in Europe and in Asia. In Europe Synthetic ETFs are now 45% of the over all ETF market. Synthetics doubled their market share between 08 and 09.

The key to Synthetics is the Counterparty.

What happens is the ETF Sponsor designs the deal, the AP (Apporved Participant. Usually one of the big banks or brokers) buys the basket of assets to make it, but then swaps that basket with the Counterparty for a different basket of assets in a derivative swap deal. However it turns out that rather too often for comfort, not only will the Sponsor and the AP be the same bank, but more often than not it will be the Asset Management branch of the same bank who will be the Swap Counter-party as well. It is quite common for the same bank to play all three roles. So a single bank creates the ETF, appoints itself as AP so it can fund it and then its Asset Management desk becomes the derivative counterparty in order to mutate the whole thing into a synthetic ETF. Think about what this does to the risk. What was market risk, where the risk was spread out across all the different shares, is now a single counterparty risk. The bank has effectively put all the ETF’s risk in one basket – itself.

But even if it is a different bank acting as the derivative counterparty the situation is only very slightly less incestuous because it is nearly always the case that the Sponsor, AP and Counter-party will all be from the same small group of big banks, brokers and Asset Managers. And it is also a statistical fact that all of them will be counterparties with each other many, many times over, via the over $1.2 Quadrillion of other repo, rehypothecation and derivative deals. This, as the Financial Stability Board’s report on instabilities in the ETF market rather laconically puts it,

…may also generate new types of risks, linked to the complexity and relative opacity of the newest breed of ETFs. The impact of such innovations on market liquidity and on financial institutions servicing the management of the fund is not yet fully understood by market participants, especially during episodes of acute market stress.

Not fully understood? I think we may not have understood what such entanglements of reciprocal risk meant before the first period of ‘acute market stress’, but I think now it is nutty to imagine the banks don’t know how risky such risk incest really is. The FSB report itself concludes,

Since the swap counterparty is typically the bank also acting as ETF provider, investors may be exposed if the bank defaults. Therefore, problems at those banks that are most active in swap-based ETFs may constitute a powerful source of contagion and systemic risk.(P.4)

Please step forward Deutsche Bank and Soc Gen!

A “powerful source of contagion and systemic risk”. Sounds really good for you and me. So why are the banks doing it anyway? The official answer is that using Derivatives means the ETF can track the value of the market more closely. Though few have complained that Vanilla ETFs don’t track closely enough. And as the BIS report points out,

…the lower tracking error risk comes at the cost of increased counterparty risk to the swap provider. (P.8)

But this doesn’t answer why a bank would enter into a swap with itself as the counterparty. The whole idea of counterparties, once upon a time, was to hedge some of the risk in the original deal by passing it off to someone else. Using yourself as counterparty keeps the risk in-house. So once again why?
The answer is, according to the BIS report on ETFs,

…that this structure exploits synergies between banks’ collateral management practices and the funding of their warehoused securities. (P.5)

‘Synergies’ sounds like it should be good. Sadly it may not be. As the BIS goes on to explain,

…synergies arise from the market-making activities of investment banking, which usually require maintaining a large inventory of stocks and bonds …. When these stocks and bonds are less liquid, they will have to be funded either in the unsecured markets or in repo markets with deep haircuts. (P.8)

In essence it costs the banks money to have illiquid assets on their books. The repo markets won’t accept them as collateral unless they come with a deep haircut. So the banks can do little with them except sit on them. Basically it costs the bank to have the illiquid, hard to sell or Repo, stocks on its books. But.. .if they happen to have created a handy synthetic ETF, then everything changes because,

For example, there could be incentives to post illiquid securities as collateral assets [in the ETF Swap]…. By posting them as collateral assets to the ETF sponsor in a swap transaction, the investment bank division can effectively fund these assets at zero cost….

Handy isn’t it? Assets they can’t repo without hefty haircuts can be posted as collateral to their own ETF with the approval of the ETF Sponsor of course – who will just happen to be… the same bank – without those pesky, hurtful haircuts. In fact,

The cost savings accruing to the investment banking activities can be directly linked to the quality of the collateral assets transferred to the ETF sponsor.

The worse they are, the more illiquid, the more the bank saves/makes by choosing to put them in an ETF rather than having them loiter on its books.

…the synthetic ETF creation process may be driven by the possibility for the bank to raise funding against an illiquid portfolio that cannot otherwise be financed in the repo market. (FSB report P.4)

This is surely financial innovation at its shining best.

Now of course the banks will say they would never consider slipping some old tat into their ETF under cover of opacity. Except that they did, every one of them, do exactly that when they systematically and grossly lied about every single aspect of hundreds of billions worth of shabby mortgages which they intentionally stuffed into CDOs in order to shaft and rob those they sold them to. This is a matter of public record...."

Read the rest here.

See also Part 1 - ETFs and Derivatives Will Be the Trigger Event For the Next Financial Crisis



"The World Is Deaf" (ou peut-être, 'fou furieux à nouveau' - Jess)

Comex Silver Inventory Watch - Heading Into May-July Delivery Period

The long term decline in deliverable supply at this price level could become quite interesting.

The only ways to obtain more deliverable inventory to meet a bulge in demand is to game the rules on the ability to take physical delivery or let the price rise by buying on the open market.    

The push by the CFTC for position limits may tighten the ability to take delivery from 1,500 to 1,000 contracts, but hedgers will be exempt from position limits on the short side.  And the big silver short JPM claims to be a hedger.

I keep hearing stories of negotiated prices above the public quotes to buy off large delivery claims.  I would be interested to know if anyone has proof of this.  We know there are large agreements being conducted around the publicly quoted prices all the time. The FX pit traders walked out in protest over a recent occurrence.  It does not take an economist to understand what this does to price discovery and market efficiency.

The estimates I have seen of how much silver is real and how much is conflicting paper claims (leverage of unallocated claims) is up to 100:1.   Some of those claims are reported to be covered by 'inventory in the ground' which is not readily available for delivery.

One can only wonder how well confidence in the Comex would receive another 'stolen assets' scandal like the confiscation of gold and silver that happened to customers of MF Global.

The central banks have long ago dispersed their caches of silver to the market, so they are not available to supply ready inventory at leased rates.   One might look to SLV and wonder who audits its custodial integrity of unencumbered physical bars and how often.  

As I recall the sponsor of the ETF is Blackrock, but the custodian and keeper of the vault holding the physical silver backing the ETF is JP Morgan.  As you may recall, JPM is holding a massive short position on the silver futures, as best we can determine. 

JPM claims they are a hedge on behalf of other parties.   If they are using the SLV inventory as collateral in any way, then someone needs to be paid a visit by the SEC and CFTC because the owners of the shares have a superior claim to the metal.   That smells like 'hypothecation' in the manner of MF Global.  But I suspect that rather than blaming Edith O'Brien one might blame Bear Stearns.

I am not saying this is 'illegal' but it certainly warrants disclosure if it is occurring.  And if the CFTC knows this and is sitting on the information in their four year old and still unreleased silver manipulation report, then Gary Gensler needs to appear before the Congress and answer some very tough questions about conflicts of interest and withholding of key market information.

Of course the prudential time to ask those questions and obtain the answers is now, and not after the carnage of a commercial failure devastates investors, global industry, and market confidence.

Will anyone listen to this?   Did anyone listen to Harry Markopolos before Madoff's fund blew up?

These days it seems like the US financial markets are a train wreck happening in slow motion.  Or almost like watching a B horror movie.  You hear the music and you know what's coming, but there is no way to warn the campers.

'Our rivals are scared shitless of us.'   Blythe Masters

How Jason P. Morgan sees itself in the markets  lol

JPM Trader Bruno Iksil Driving Derivatives Markets with 'Massive Positions' and 'Excess Capital'

A secretive JPM Trader in London, alternatively known as 'the London Whale' or 'Voldemort,' is distorting the credit derivatives markets with massive positions, and a willingness to move them advantageously in the markets.  It is a classic case of gambling with other people's money, in this case the excess capital provided by the Fed and the Treasury.

I am sure they are all legitimate hedging positions as Blythe Masters just asserted without proof.  lol.

There may be action on this, however, as JPM is hurting other trading desks and not the average person.  The public is prey but the financial powers take care of their own.

JPM is TBTF (Too Big To Fail) and TCTP (Too Connected To Prosecute).

This must seem ironic given Jamie Dimon's recent 38 page letter complaining about regulations which are stifling his firm.  See this Bill Moyers interview with Paul Volcker about 'Gambling with Other People's Money.

London and NY are the centers of global market abuse, particularly London which provides a haven for privileged abuse.

JP Morgan has to all appearances been distorting various markets for years with impunity. They dominate the silver market with opaque positions and have been the subject of an inquiry by the CFTC which has been quietly stalled for years, most likely based on their political influence and government ties.

If the full truth ever comes out it may be a scandal larger than Enron, Lincoln Savings, and Madoff combined. And that is why it likely will not ever be fully revealed, because it compromises so many in the political and financial establishment. It is a premier example of the credibility trap that is stifling genuine reform and real economic recovery.




JP Morgan Trader's Heft Distorting Markets - The Times of India

JPM Front Runs the Fed, Raises Dividend, Announces $15B Stock Buyback - MBA's Are Passé

At least two of the big US banks have decided to pre-release the news, intended for a formal release on Wednesday, that they have 'passed' their Fed stress tests.

Bending the rules and front-running the Fed is what Wall Street does best, and no one does it better than JPM. Do you think their traders were short the market? lol.

Note: Because of these pre-announcements and the objections of the other banks who were following the rules, the Fed has moved up their stress test results release to 4 PM today. Good boy, Ben. Have a cookie.

JP Morgan was first to announce their exorbitant privilege, as head boy, and the Fed's house bank. Bank of America quickly followed with their own sterling results, right after JPM announced theirs.

Perhaps this was Jamie's way of telling Mr. Koutoulas to put his 'open letter' on integrity in banking where the moon don't shine. And putting his titular regulator, Mr. Bernanke, in his proer place.

I was a little amused today to hear that business college students are eschewing MBAs in favor of degrees in Finance and Accounting. An MBA is designed to actually run a real business, which is just so yesterday.

Better to learn to financialize, and move money around the plate with the greatest of ease. That is the big thing, and the message that the bright minds of the Empire have taken to heart.

It is nice to see that the Fed has saved the Banks. But now, the rest will have to fend for themselves.

Bonus time!

Bloomberg
JPMorgan Chase Boosts Dividend, Unveils $15 Billion Buyback
By Greg Chang
Mar 13, 2012 3:07 PM ET

JPMorgan Chase & Co. (JPM) said it boosted its common stock quarterly dividend by 5 cents to 30 cents a share.

The lender also authorized a new $15 billion stock buyback program, of which up to $12 billion is approved for this year and up to an additional $3 billion is approved through the end of the first quarter of 2013.

JPMorgan said the Federal Reserve raised no objections to the proposed capital distributions.

The MF Global Bankruptcy Filing: Did the Regulators Sell Out the Public for JP Morgan?

What seems fairly obvious is that the law calls for MF Global to file a Chapter 7 bankruptcy in which customers are given seniority to creditors, rather than a Chapter 11 non-broker bankruptcy in which the customer interests are not upheld.  The rationale for Chapter 11 has always seems to be contrived to favor a particular creditor bank.

Prior CFTC rulings and 'Rule 190' seems to have dealt with this in the past.  Statements by various CFTC commissioners of late also seem to suggest that customers absolutely have a senior claim to any assets.

Why then did the SEC, with Gary Gensler's purported assent, seem to ignore the precedent and their own rules and cut a deal in a secret meeting to favor the Banks, specifically JP Morgan?

The personal involvement of Gary Gensler seems a little ambiguous based on the facts at hand, but it is obvious that the bankruptcy filing is being mishandled, and the SEC and CFTC are doing too little to represent the interests of the customers.

Obviously this should be more explicitly addressed and the customers need to be relieved of this travesty of justice. 

President Obama may speak brave words in his speeches, but the actions of his Administration show that there is little teeth in their supposed championing of the public interest over the powerful interests of Wall Street.   Actions speak louder than words.

MFGFacts
CFTC Warnings When Bankruptcy Codes Conflict: And a Still Secret Meeting

Last week we witnessed lawyers dueling in the bankruptcy court on the details of exactly what code of law supports customer priority in liquidation of the parts of MF Global Holdings, and gosh!….is the Holdings is even a broker ? Why are lawyers debating these questions at this late date?

First we’ll cover what started the fight and then move onto the genesis of why it has come to this so far into the proceedings. Do stick with the story as it might sound like legal minutiae, but does have everything to do with recovery of customer funds.

It started with the Sapere Wealth Management, LLC assertions (among others) that the MF Global estate must be administered under 17 C.F.R paragraph 190. Remember paragraph 190 as you will hear more about this in the next weeks. Applying this clause of the bankruptcy code to the liquidation of MF Global Holdings would assure customer priority in the liquidation of MFGH, which is also claimed to have taken customer assets out of MFGI, the commodity brokerage unit of the Holdings company, MFGH — before and after the bankruptcy.

That all customer property as defined in paragraph 190 of the code, must be returned to commodity customers free and clear of other claims is also supported by others parties, including the CFTC. The CFTC, however, also asserts that existing principles of law are available to ensure this, but first the court needs to make “antecedent determinations.” In other words, the CFTC legal team is playing the adult and indicating that we already have the laws on the books to deal with this once the court figures out what laws it wants to use.

So why is the question if MFGH is even a broker so important? Again, the key paragraph 190, which legally secures customer priority and distributions can only be applied to a brokerage Chapter 7 bankruptcy, which is used for brokerage bankruptcies, but was not used for MFGH, which is the holding company of MFGI. MFGH was filed as a Chapter 11 bankruptcy. This Bankruptcy Code is used for non-broker entities, seeking re-organization.

Also, and to use the words of the Sapere plea to the court, “A decision by the court that 17 C.F.R §190 applied to MFGH’s estate can, among other things, obviate the need for titan law firms representing MFGH and MFGI, respectively, to engage in battles with one another funded by “other people’s money,” i.e., at substantial costs to the estates of MFGH and MFGI.”

The ability to use many millions of customer funds locked in the estate to pay trustees and their “titan” law firms representing MFGH and MFGI is possible because the bankruptcy was filed as a Chapter 11 for the Holdings and Chapter 11 SIPC filing for MFGI, the commodity brokerage, and not under Chapter 7 for both.

As regular readers know, from the start of this sorry saga, MFGFacts.com has focused on the questions around why a Chapter 11 SIPC bankruptcy with almost non-existent securities accounts when neither SIPC nor Chapter 11 address brokerage liquidations. Additionally, Chapter 11 is the choice when a restructuring is planed, which is not so with MFGH.

A Breaking Investigative Report

Fortunately, these question are now receiving greater scrutiny in the industry press as we read in this investigation published last week by Mark Melin of Opalesque Futures Intelligence who contacted MFGFacts.com while conducting his investigation, Sold Out: How A Private Meeting Between Regulators Gave Away MF Global Investor Protections. In short, as Melin reports, “Deciding upon a Securities industry SIPA liquidation process for an FCM over the Commodity Exchange Act (CEA) liquidation and section 7 of the US Bankruptcy Code was a legal maneuver with far reaching consequences for customers with segregated funds and property with custodial banks. The selected SIPA liquidation does not recognize fund segregation or futures industry account regulations. The process considerably favors creditors.”

In other words, when the SEC threw the liquidation process to SIPC under for a Chapter 11 securities liquidation, and with the CFTC’s immediate agreement (under the conflicted Chairman Gensler who had not yet to recuse himself from MF Global issues), a framework of law was chosen where customers were — for the very first time ever — made creditors and their assets thrown into the entire MF Global estate. Many say what! And the industry is now asking how?

According to the report, the speculation is this: Robert Cook, SEC Director of Division and Trading and Markets is said to have been the lead regulator at the key meeting, the details of which are still not public. “Before joining the SEC, Mr. Cook was a partner at the powerful Washington D.C. law firm of Cleary Gottlieb Steen & Hamilton LLP, which represents JP Morgan, among other clients,” Melin reported. We all know that JP Morgan is the largest creditor to MF Global Holdings. Readers may reach their own conclusions about that. Yet, making the liquidation of MF Global Holdings and its parts a Chapter 11 and SIPC bankruptcy, set the stage for expensive dueling among lawyers over the fact if MF Global is even a broker or not. This also and — most importantly — tremendously enhanced the recovery position for non-customer creditors over all customers.

The CFTC Warned in the 1980s of Potential for Abuse and Problems when Bankruptcy Codes Conflict with a Duel Registered Entity

As Melin shares, that the CFTC – to the agency’s great credit — recognized and dealt with this problem: Citing the exemplary record in the futures industry in the event of bankruptcies, former CFTC Director of the CFTC Division of Trading, Andrea Corcoran writes in a January 1993 issue of Futures International Law Letter “As early as 1980, however, concerns were expressed about the ability to retain this record in the event of the bankruptcy of a dually-licensed firm – that is, a firm registered as both a futures commission merchant (FCM) and a securities broker-dealer.”

To rectify this, the CFTC then drafted rules we find under then now famous Part 190 where Corcoran writes, “In the final rules, the Commission noted that Section 7(b) of SIPA (read Securities Investors Protection Act) …proved that a trustee in a SIPA liquidation shall be subject to the same duties as a trustee in a commodity broker bankruptcy under Subchapter IV of Chapter 7 of the Code.”

The CFTC was well prepared for a MF Global-like event. Against this background, and as Melin also reports, the choice of a Chapter 11 SIPC bankruptcy code for the liquidation of a futures broker, makes Chairman’s Genslers “give away” even more baffling. We’d call it a throw away and ask if Chairman Gensler invited a single CFTC attorney into that early hour meeting before agreeing to file MFGI under MFGH as a Chapter 11 SIPC bankruptcy? Regardless, with that decision the fate was sealed. And not only were customers and the industry severely damaged, but there was a complete disregard of the decades of work, preparation and public service by the many professionals in the CFTC to which Chairman Gensler was entrusted.

And now we have the spectacle of “titanic” lawyers in one of the largest bankruptcies ever arguing if an entity is a broker or not.

JP Morgan Chase Accused of 'Brazen Bankruptcy Fraud'

Maybe this was their warm up for the shenanigans in the MF Global bankruptcy case. Or their long term manipulation of the silver market. 

If these allegations are true, why doesn't the California Attorney General or the Justice Department investigate this criminal conspiracy to abuse the legal system? (rhetorical question).

The only presidential candidate that the bankers fear and respect is Ron Paul.

Courthouse News Service
Chase Accused of Brazen Bankruptcy Fraud
By MATT REYNOLDS
January 17, 2012

LOS ANGELES (CN) - JPMorgan Chase routinely fabricated documents to deceive bankruptcy judges, going so far as to Photoshop documents to "create the illusion" of standing "in tens of thousands of bankruptcy cases," according to a federal class action.

Lead plaintiff Ernest Michael Bakenie claims that Chase's "pattern and practice of playing 'hide-and-seek' with debtors, judges and other bankruptcy players" bore rich fruit: that Chase secured motions for relief of stay and proofs of claim in 95 percent of its cases.

"Through the use of fabricated assignments, endorsements and affidavits that purport to transfer deeds of trust, notes and the rights to all monies due under the terms of tens of thousands of non-negotiable promissory notes (the 'MLNs'); Chase has demonstrated a pattern and practice of playing 'hide-and-seek' with debtors, judges and other bankruptcy players," the complaint states.

"Chase intentionally conceals the identity of the true parties in interest entitled to enforce the tens of tens of thousands of residential non-negotiable promissory notes (the 'MLNs') for its own financial benefit, at the expense of the class and to the detriment of the integrity of the bankruptcy system."

Bakenie says Chase used a network of attorneys to file more than 7,000 motions for relief from automatic stay in bankruptcy cases in the Central District of California, "wherein they falsely claim to be the party entitled to monies due under the terms of MLNs."

Chase rewards attorneys based on how quickly they can secure the stays, and uses fabricated documents to establish chain of title on loans, according to the complaint...

Read the rest here.

J P Morgan Says "We Love Gold"

JPM loves gold, and recommends buying the miners to play it with gusto no less.

I know, it's kind of creepy at first blush, isn't it?  Do Bankers blush?   Do their algos dream of electronic sheep?

Curiouser and curiouser.

What's next, will Jonny Nads turn bullish on what his people have been selling for years, and many times over it appears? Perhaps that would be just too much, and contrarian indeed.

It must make that other craven crow, Jeffery boy, just flip his wig a hundredfold to hear such heresy from the princes of the metal bashing set.

Well, it could be a nicer look for Blythe.  Gold flatters the face, whereas silver makes one pale.

Perhaps it is just a distraction from silver, which their central bank cronies cannot lend to them, having little or none anymore. Or perhaps a central bank chum whispered some words of hidden wisdom into their ear.  I have heard faint whisperings as well.

"I have heard the mermaids singing, each to each...
I have seen them riding seaward on the waves
Combing the white hair of the waves blown back
When the wind blows the water white and black.
We have lingered in the chambers of the sea
By sea-girls wreathed with seaweed red and brown
Till human voices wake us, and we drown."

Well perhaps not so much human, as dismal voices, the mumblings from the bearded men of the financial demimonde.

Was that a bear hug they gave it today?  Or were they just clearing the decks for their own trades.  Hard to tell in all this excitement, who is zooming whom.

But what goes around apparently comes around, and this has been a long time coming. As the founder of their bank, James Pierpont Morgan himself, once said:

"Gold is money. Everything else is credit."

Mirabile dictu. Barbarous is Back.

WSJ
Gold: J.P. Morgan ‘Loves’ It Big Time
By Dave Kansas
August 4, 2011, 9:49 AM ET

As Old Yeller races higher, J.P. Morgan comes out today with a report banging the drum for the barbarous relic.

“We love gold,” J.P. Morgan says. They add: “Many investors may look at the gold price chart with disappointment and assert it’s too late for them to buy. We disagree.”

The bank says that Western governments need to either raise taxes or cut spending or both, and nobody in authority seems ready to take those kinds of tough decisions. As long as everyone’s punting, J.P. Morgan believes gold will keep rising.

J.P. Morgan also points out that South Korea’s central bank recently snapped up 25 tons of gold, joining Mexico, Russia and Thailand as big buyers of the yellow stuff.

In a twist, JPM says gold stocks, which have lagged the surge in gold prices, might be a good vehicle to get into the gold game. They like Goldcorp, Kinross, Newmont and Barrick.

Silver Market Hit Hard With Bear Raid - The Infamous Dr. Evil Strategy

Yesterday I said:

"Today was the option expiration on the Comex, and those options which are 'in the money' and have not been settled for cash are now converted to March futures positions.

Depending on the size and distribution of those conversions we may see some 'action' in the front month because they are sometimes notoriously weak hands and will receive at least one 'gut check.'"

And a gut check to run the stops was very obviously delivered in the afternoon trading session at the Comex and across the monthly contracts.

This is remniscent of the 'Dr. Evil' strategy that got Citi warned and fined in Europe a few years ago. Memories of Citi's Eurobond Manipulation At the time one of the defenses offered by an ex-pat trader was 'in the US everybody does it.' Has JPM taken up the trading strategy that Citi once made infamous? And why would banks be trading for themselves in markets with players they help to finance, and with public money?

Large players can come into a relatively small market and drive the price by selling in size, running the stop loss orders which they often can 'see' through probing orders and positional advantage, and essentially bomb the market, manipulating the price in the short term to their advantage. The profit is made through derivative and correlated bets that depend on the price of the metal, index, or bond such as shorts on mining stocks, currencies, bonds, etc.

This is why the 'uptick rule' in stocks served a purpose, and why regulators are in place to keep an eye on big players with deep pockets and a far reach. In a properly regulated market the CFTC would immediatly pull the trading records for today and track the big sellers, and inquire as to the reasons for their sudden selling in a quiet market.

It *could* have been a hedge fund margin call. It could even have been a margin call provoked by a bank tightening credit lines with one hand while playing the market with their other hand. There were rumours being spread all week keying in on the day after expiration.  I do not have any inside information, no special knowledge, only the advantage of experience and a watchful eye on the markets.

And so there it all is. I was ready for it. I may or may not make money from it, but at least I had flattened my positions as I had said earlier this week and did not lose from it. But it sickens me to the heart nonetheless, to see a once great government fallen so low.

New COMEX Related Silver Manipulation Lawsuit Includes Charges of 'Racketeering'

Self-regulation and efficient markets hypothesis. Feh!

It will be interesting to see if this makes it into the discovery process and if any government officials will assist in the investigation process. This looks like a job for hairy knuckled prosecutors armed with subpoenas and wiretaps.

The mainstream media will most likely ignore this and the usual suspects from the demimonde of the financial media will dismiss it as nonsense.

One has to wonder if this is what CFTC commissioner Bart Chilton was alluding to in his recent statement.

NEW YORK, Nov. 3, 2010 /PRNewswire/ -- JP Morgan Chase & Co. (NYSE: JPM) and HSBC Securities Inc. (NYSE: HBC) face charges of manipulating the market for silver futures and options in violation of federal commodities and racketeering laws, according to a new lawsuit filed Tuesday in the U.S. District Court for the Southern District of New York

The suit – which alleges violation of the Commmodity Exchange Act and the Racketeering Influenced and Corrupt Organizations (RICO) Act – alleges that the two banks colluded to manipulate thhe market for silver futures starting in the first half of 2008 by amassing huge short positions in silver futures contracts they had no intent to fill, but did so to force silver prices down to their benefit.

The suit was filed on behalf of Carl Loeb, an independent investor in silver futures and options, by Seattle-based Hagens Berman Sobol Shapiro LLP, a class-action and complex litigation firm. "The practice of naked short selling has long been a serious issue on Wall Street," said Steve Berman, co-counsel and managing partner at Hagens Berman. "What we know about the scope and intent of JP Morgan and HSBC's actions in this short-selling scheme dwarfs any other similar attempt to manipulate a commodities market."

According to the complaint, JP Morgan amassed a sizeable short position in silver futures and options in part through its March 2008 acquisition of investment bank Bear Stearns. By August 2008, JP Morgan and London-based HSBC controlled more than 85 percent of the commercial net short position in silver futures contracts.

The suit alleges that, starting in early 2008, the two banks began manipulating the silver futures market by accumulating unusually large "short" positions and then secretly coordinating enormous sales of silver futures contracts on the Commodity Exchange, which is known as "COMEX" and is part of the New York Mercantile Exchange.

According to the lawsuit, JP Morgan and HSBC used a variety of methods to coordinate their manipulation of the market for silver futures contracts, signaling when to flood the COMEX market with short positions, which caused the price of silver futures and options contracts to crash.

The suit describes two "crash" events that were set in motion by JP Morgan and HSBC, one in March 2008, and the other in February 2010, after defendants had amassed large short positions. In the wake of both events, the suit alleges, COMEX silver futures prices collapsed.

"We believe that JP Morgan and HSBC's scheme was carefully conceived and coordinated to maximize their profits at the expense of innocent investors who believed that they were trading in a market free from manipulation," Berman said.

The complaint also contains allegations that in September 2008, the U.S. Commodity Futures Trading Commission launched an investigation that would eventually consider allegations made by a London-based independent metals trader named Andrew Maguire that the silver futures market was being manipulated.

The complaint alleges that Maguire disclosed to the CFTC on Feb. 3, 2010 that he received a signal from the two banks of their intent to drive down the prices of silver futures two days later, on Feb. 5, 2010. Maguire's information was correct and the price of silver dropped dramatically between Feb. 3, 2010 and Feb. 5, 2010.

In addition, the lawsuit states that both JP Morgan and HSBC still maintain highly concentrated holdings in short positions in silver futures and options, giving both banks the ability to continue manipulating the price of silver.

Plaintiffs' attorneys have asked the court to certify the case as a class action and enjoin JP Morgan and HSBC from continuing their alleged conspiracy and manipulation of the silver futures and options contracts market.

Attorneys also ask the court to award damages and attorneys' fees to the class.

Just remember that Blythe said Don't Panic. She's got your backs. Or is busy cutting a deal. You will have to decide which is more likely.

I also hear that high flyer Steve Black, who was promoted up at the beginning of the year, will be leaving JP Morgan.

SP Daily Chart: US Equity Rally Reverses on SEC Probe of JPM and Magnetar CDO Issuance

The US equity market reversed its rally with the better than expected ISM number on news that JPM is under SEC investigation as reported by Bloomberg.

It appears as though JPM put together a CDO with Magnetar, which helped to select some of the components. While Magnetar bought some of the CDO, it also invested a significant amount in CDS that bet on the failure of the CDO.

The implication is that JPM and Magnetar did some of the same things that Goldman and Paulson had done.

This reversed the rally and took the financials down.

Personally I think US equities are still in their trading range with 1168 as a lower bound and 1194 as the upper bound. The wiseguys are doing a daily wash and rinse on the specs. Volumes are thin and positions are almost without any substantial foundation with the average holding time of most positions under a minute. This is a market that seems primed and ready for a flash crash, but it requires some 'trigger event' to materialize. So timing a trading decline is a bit of a fool's game in the short time.

There are three events that could affect US equities this week.

First is the national midterm election tomorrow, in which the Republicans are widely expected to take control of the House of Representatives. The Senate is a much less certain outcome. Most likely there will be 'gridlock' in the US for the next two years with power more evenly balanced between Republicans and Democrats. Any divergence from expectations in the elections results could provide some momentum out of this trading range.

The next event will be the FOMC decision on Wednesday with wide expectations of a $500 billion commitment to quantitative easing. A significant deviations from this number could provoke a market reaction.

And finally back to the real economy there will be a Non-Farm Payrolls report on Friday that will be closely watched. Consensus is for 60,000 jobs to be added.

In the background there is the 'cargo cult' of new terrorist threats permeating the news with the revelation of disguised bomb packages originating in Yemen.

This market is so artificial that it is difficult to forecast just what it will do that is out of trend.

Chart added at 4:20 PM NY Time