A New Lawsuit Against JPM and HSBC for Silver Manipulation With An Interesting ETF Twist

This lawsuit specifically cites JPM and HSBC as custodians of the largest silver ETFs, SLV and SIVR, and how they used that market positioning to manipulate their knowledge and market positioning as custodians of these funds to manipulate the silver price to their benefit.

The goal of this lawsuit is to move to the discovery process, and to attach itself to the ongoing CFTC and DOJ investigations into the silver market. It will be very interesting to watch this drama unfold over the coming months.

It is always worrisome when the 'house' sits down at the same table as the players and bets against them. It ought to never be permitted except in the course of making a market in limited circumstances, because as the lawsuit also illustrates, the opportunity for private collusion is beyond the scope of the regulators, especially given the ability for the house to deal in dark pools.

And of course the root of the problem is that the Wall Street banks, which had been engaged in massive frauds in subprime debt instruments, were never reformed, and in fact became even larger and more hungry, now devouring whole markets and even small nations in their search for fees and illicit profits.

Paul Volcker's vision of a return to 'narrow banking' may very well prove to have been wisdom as compared to the current financial system of unproductive mammoths still unfolding.

Plaintiffs vs. JPM and HSBC

8. In this case, the vast majority of trading on CME/COMEX and NYSEArca was electronic. While electronic trading was intended to allow for greater efficiency and “freer” markets, it has actually provided greater opportunities to restrain trade in the markets and manipulate prices. Rather than being visible in an “open outcry” pit and subject to the scrutiny of fellow market participants, the vast majority of trading is electronic, involving traders who sit at computer-trading terminals and place orders anonymously. Thus, unlike where pit or open-outcry trading is the dominant form of placing offers and bids, nothing prevents potential manipulators in this market from signaling or outright communicating with each other to drive the market in any direction they deem fit, or from posting sham orders that are intended to drive prices in an artificial way. In other words, because of electronic trading, market participants are generally unable to police one another. Thus, defendants JP Morgan and HSBC, had an opportunity to communicate and signal to each other their market moves (i.e., conspire and
manipulate) without detection by other market participants.

11. Before the Class Period began, JPMorgan had become the custodian and an authorized participant of the largest known concentration of silver bars, the iShares Silver ETF, which holds in excess of 340 million troy ounces of silver, a sum that equals an estimated 1/3 of the total present global supply of silver bullion. As a result, it had actual knowledge of the precise whereabouts of much of the world’s known silver bar supply.

12. In approximately March 2008, JP Morgan acquired Bear Stearns, which held a very large short position in silver. With more of the total short position in silver concentrated in the hands of JP Morgan, it had a further motive to suppress prices.

13. Upon information and belief, JP Morgan works together with HSBC, the other dominant player in the silver and precious metals markets. In July 2009, HSBC became the custodian of the SIVR ETF, which meant that it had physical access to and knowledge of the silver held by that trust. Notably, it named JP Morgan as one of the sub-custodians of the SIVR ETF.

14. As a result of their participation in the silver ETFs, JP Morgan and HSBC had a direct opportunity to confer and discuss with each other the prices of silver held by each of them.

15. In addition, Defendants had a strong incentive to suppress downward the price silver as measured by the NYSE-Arca and CME/COMEX instruments. For example, Defendants could pledge their silver to the ETFs in exchange for ETF shares, sell their shares to other market participants, drive down the prices of silver through trades on NYSE-Arca and CME/COMEX, buy back their ETF shares from investors at lower prices, and return their (now lower priced) silver ETF shares in exchange for the silver bars initially pledged against those shares, the real value of which remained the same, and only notionally appears lower because of Defendants’ suppression.

There are other ETFs which have similar setups and opportunities for market manipulation by the 'custodians' and insiders. There are a few that on the surface appear to be so stacked against the buyer as to approach the level of fraud. Professional traders snigger that those who are not specifically informed enough to find this out for themselves deserve to be 'taken.' I wonder how these smart fellows would feel if the medical profession in which they and their children are customers was managed in the same way. A bull market in infant mortality and thalidomide babies?

This is not some efficient free market but a kind of hell in which no one or nothing can be trusted, a society that dissolves into mere anarchy and madness.

But in fact the common protection of the many against the more powerful, the average person against the insider, with the creation and maintenance of a public infrastructure, are the primary functions of popular government. And if you look to the governments of the developed nations against this benchmark, too many recently appear to be miserable failures.

The source of this failure and its remedy is a familiar tale to those well read in history, and is the great story of the beginning of this century.

"It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law.

But when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society — the farmers, mechanics, and laborers — who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their government. There are no necessary evils in government. Its evils exist only in its abuses."

Andrew Jackson

The problem is not that government is inherently bad. The triumph of evil is always when good men and women do nothing, or even worse, allow themselves to be co-opted by their selfish interests into a system of injustice. No one can control the madness, the will to power, the insatiable hunger to possess. In the end it will always come for them and what they hold most dear, and consume it.

FASB to Make Dramatically Favorable Changes in Mark to Market Rules

It looks likea return to mark-to-assumptions is in the cards. The prospective rule change is targeted at large banking institutions with hold-to-maturity MBS portfolios.

This rule change will be generally known as marked-to-official-policy accounting, wherein our desired objectives are achieved by definitional manipulation and corporate decree. This is consistent with our national currency.

If the holder of a financial asset cannot obtain an active price, they can assume the cash flows will be maintained to maturity and value the asset based on that.

This is not decided yet, but we would imagine FASB is under intense pressure from the federal government and the banking lobby.


FASB to Propose Improvements to Mark-to-Market and OTTI
The American Banker
March 16, 2009

The Financial Accounting Standards Board agreed today to propose alternatives for improving mark-to-market accounting in illiquid markets and for “other-than-temporary-impairment” (OTTI). ABA has been requesting improvements to these mark-to-market issues for the past year and for improvements to OTTI for many years.

Mark-to-Market.

The proposal for estimating market values will take into consideration whether there is an active market (such as the number of recent transactions, whether price quotes are based on current information, whether price quotes vary substantially, etc.). If there is not an active market, then the quoted price is a distressed transaction unless certain other conditions exist. For distressed transaction prices, “Level 3” techniques (such as present values of future cash flows) are used instead of the distressed prices and should reflect an orderly transaction between market participants, including a reasonable profit margin for uncertainty in a non-distressed situation.

Other-Than-Temporary-Impairment.

FASB will also propose that the full market loss continue to be reported through earnings (and capital) only if the entity intends to sell or will be required to sell the security prior to its recovery. For all other OTTI, the amount of market loss will be split between the credit portion of the loss, which will be reported in earnings, and the remainder of the loss, which will be reported in “other comprehensive income.”

Effective Date and Comment Period.

The proposed effective date is for periods ending after March 15, 2009. However, FASB is concerned that some may not be able to prepare the information in time for March 31, 2009, reporting, and will request comments on whether it should be effective for periods ending after June 15, 2009, with early adoption (for March 31, 2009) permitted. Comments are due April 1, and FASB hopes to make its final decision on April 2.

FDIC Warns of Bank Deposit Insurance Fund Failure

The few banks are taking down the many because the Obama Administration does not have the will to tie off the bleeding and stitch it up.

Why? Because the money center banks are politically connected to them through a corrupt campaign funding system and lobbying effort.

One way or the other this will be resolved. It is only a matter of when, how much, who pays, and who profits.


AFP
FDIC warns US bank deposit insurance fund may tank
Thu Mar 5, 7:39 pm ET

WASHINGTON (AFP) — The Federal Deposit Insurance Corporation is warning banks that its deposit insurance fund could dry up this year amid rising bank failures although the deposits would remain fully backed by the government.

The head of the Federal Deposit Insurance Corporation, Sheila Bair, in a letter to bank chief executives dated March 2, defended the FDIC's plan to raise fees on banks and assess an emergency fee to shore up the fund and maintain investor confidence.

Bair acknowledged the new fees, announced Friday, would put additional pressure on banks at time of financial crisis and a deepening recession, but insisted they were critical to keep the insurance fund solvent and protected.

"Without these assessments, the deposit insurance fund could become insolvent this year," Bair wrote.

The FDIC chief said in the letter that the rapidly deteriorating economic conditions raised the prospects of "a large number" of bank failures through 2010.

"Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative," she wrote.

The FDIC last Friday announced it would impose a temporary emergency fee on lenders and raise its regular assessments to shore up the rapidly depleting deposit insurance fund that insures individual customer deposits up to 250,000 dollars.

A week ago the FDIC reported a sharp depletion of the deposit insurance fund in the fourth quarter due to actual and anticipated bank failures, to 19 billion dollars from 34.6 billion in the third quarter.

The FDIC said it had set aside an additional 22 billion dollars for estimated losses on failures anticipated in 2009.

"Some have suggested that we should turn to taxpayers for funding. But banks -- not taxpayers -- are expected to fund the system, and I believe Congress would look skeptically on such a course of action," Bair wrote.

"All banks benefit from the FDIC's industry-funded status and should take pride in it. Keeping the guarantee industry funded will serve banks well once this current crisis passes. Turning to taxpayers for support, on the other hand, could paint all banks with the 'bailout' brush."

The Banking Crisis: Obama's Iraq Part 2

It is hard to assess who among the current DC crew are more limp when it comes to addressing the banking crisis in a meaningful and effective manner: Geithner, Summers or Bernanke.

They are all the very picture of the bureaucrat, which is a nice way of saying "systemic hacks." Have Timmy and Ben have reached their level of incompetency? Larry Summers has far exceededed his some years ago at Harvard.

It is difficult ground when one speculates on motives, but these are all rather bright fellows, albeit creatures nurtured by the system that they serve. It is hard to accept that their inability to address our financial crisis is sheer incompetency. But for now they obtain the benefit of doubt and the CEO's defense made so popular by the Enron crowd.

We wonder how bad it will get before Obama understands that his team is not working, that they have no actionable vision among them for whatever combination of reasons, and that the corruption being perpetuated is starting to stick rather handily to the Democrats.

The banking crisis is starting to look like Obama's Iraq.


Bloomberg
Hoenig Says Treasury Failed to Take ‘Decisive’ Action on Banks
By Steve Matthews and Vivien Lou Chen

March 6 (Bloomberg) -- The U.S. Treasury has failed to take “decisive” action to address the bank crisis, pursuing an ad- hoc approach that leaves management in place and avoids necessary asset writedowns, a veteran Federal Reserve official said.

“If an institution’s management has failed the test of the marketplace, these managers should be replaced,” Fed Bank of Kansas City President Thomas Hoenig said in prepared remarks for a speech in Omaha, Nebraska. “They should not be given public funds and then micro-managed, as we are now doing” with “a set of political strings attached.”

Hoenig’s comments are the most detailed criticism of the Treasury’s actions by a Fed official since the financial crisis began. By contrast, Fed Chairman Ben S. Bernanke has endorsed the approaches taken by Treasury Secretary Timothy Geithner and his predecessor.

Geithner is requiring a “stress test” for the largest 19 U.S. banks to determine if they need more capital. He has stressed that nationalization isn’t the goal.

Last week, the U.S. government moved to convert some of the preferred stock it owned in Citigroup Inc. to common shares, gaining a 36 percent stake in the company and boosting Citigroup’s buffer against future losses. While authorities pushed for changes to the makeup of Citigroup’s board, Chief Executive Officer Vikram Pandit remains at the helm.

Hoenig said while policy makers “understandably” want to avoid nationalizing banks, “We nevertheless are drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis.”

The Treasury’s $700 billion Troubled Asset Relief Program “began without a clear set of principles and has proceeded with what seems to be an ad-hoc and less-than-transparent approach,” Hoenig said today.

Banking regulators need to be willing to write down losses, bring in new managers and sell off businesses if institutions can’t survive on their own, “no matter what their size,” said Hoenig, the second-longest serving of the Fed district bank presidents, after Minneapolis’s Gary Stern.

The Banking Crisis: Obama's Iraq Part 1

Its a step in the right direction, but its hardly reform.

Everything about the Obama Administration to date has been 'limp,' toothless, almost apologetic.

Obama is on the road to failure, getting an "A" for rhetoric but "F's" for vision, commitment, team-building, and action.


Bloomberg
Volcker Urges Dividing Investment, Commercial Banks
By Matthew Benjamin and Christine Harper

March 6 (Bloomberg) -- Commercial banks should be separated from investment banks in order to avoid another crisis like the U.S. is experiencing, according to former Federal Reserve Chairman Paul Volcker.

“Maybe we ought to have a kind of two-tier financial system,” Volcker, who heads President Barack Obama’s Economic Recovery Advisory Board, said today at a conference at New York University’s Stern School of Business. (Uh, didn't we have one up until a few months ago when Goldman Sachs and Morgan Stanley put on the Fed feedbag? - Jesse)

Commercial banks would provide customers with depository services and access to credit and would be highly regulated, while securities firms would have the freedom to take on more risk and practice trading, “relatively free of regulation,” Volcker said. (OMG - Jesse)

Volcker’s remarks indicated his preference for reinstating some of the divisions between commercial and investment banks that were removed by Congress’s repeal in 1999 of the Great Depression-era Glass-Steagall Act.

Volcker’s proposals, included in a January report he wrote with the Group of 30, would allow commercial banks to continue to do underwriting and provide merger advice, activities traditionally associated with investment banking, he said.

Still, Goldman Sachs Group Inc. and Morgan Stanley, which converted to banks in September, would have to exit some businesses if they were to remain as commercial banks, he said.

‘Separation’

“What used to be the traditional investment banks, Morgan Stanley, Goldman Sachs so forth, which used to do some underwriting and mergers and acquisitions, are dominated by other activities we would exclude -- very heavy proprietary trading, hedge funds,” he said. “So there’s some separation to be made.”

Jeanmarie McFadden, a spokeswoman for Morgan Stanley, declined to comment. A Goldman spokesman couldn’t be immediately reached.

Volcker also said international regulations on financial firms are probably an inevitable consequence of the industry’s current problems.

“In this world, I don’t see how we can avoid international consistency” on securities regulations going forward, he said. “The U.S. is no longer in a position to dictate that the world does it according to the way we’ve done it.”

Volcker’s comments come as President Barack Obama seeks legislative proposals within weeks for a regulatory overhaul of finance, especially companies deemed vital to the stability of the financial system.

Glass-Steagall

The new regulatory framework may stop short of reinstating Glass-Steagall, analysts say, though banks may separate their business lines in order to avoid strong regulatory scrutiny.

Volcker, who ran the Fed from 1979 to 1987, said the financial industry’s problems stem from larger issues. “I don’t think this is just a technical problem, it’s a societal problem,” he said. He cited bankers on Wall Street receiving multimillion-dollar bonuses for engineering failed mergers.

“There’s something wrong with the system,” Volcker said. “What are the incentives, what’s going on here?”