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

Silver in Backwardation and the Emperor, Once Again, Nearly Naked

Growing panic in Paperville. The central banks have no silver, and the Comex is being depleted. Interesting that the SLV ETF inventories are experiencing large outflows. The patriotic miners are being called upon to hedge their deep storage inventories, that is, unrefined metal in the ground, to provide more paper.

This manipulation of silver and gold could be a John Law class debacle when it is exposed and collapses, depending on how high the leverage in paper has gone. And of course how deeply down the rabbit hole the people are willing to go in the discovery of real value and the truth.  Given what has recently transpired, I suspect not too far.

The mailbag this morning has the usual dose of overly kind words for which I am always grateful, useful information and notification of alas, typos. But also of hysteria, from those who fear the government is going to come and take their money, or who think that people like me are going to spoil their good thing by warning people about it. Thank God for spam settings.

I don't think most people realize how little their opinion matters anymore. At some point the truth is simply what it is, without regard to what we think about it, or whether we like it. Their good thing is over. It's in the end game now, and we are all in God's hands.

John Law (baptised 21 April 1671 – died 21 March 1729) was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade. He was appointed Controller General of Finances of France under King Louis XV.

In 1716 Law established the Banque Générale in France, a private bank, but three-quarters of the capital consisted of government bills and government-accepted notes, effectively making it the first central bank of the nation. He was responsible for the Mississippi Bubble and a chaotic economic collapse in France."

I believe that "modern monetary theory" owes much to John Law, and Money and Trade Considered, with a Proposal for Supplying the Nation with Money (1st ed., 1705; 2nd ed., 1720).

“An abundance of money which would lower the interest rate to two per cent would, in reducing the financing costs of the debts and public offices etc., relieve the King.”

John Law

Here is a brief discussion of John Law and the parallels for today's crisis from Buttonwood at The Economist.

I think there is a bit of disinformation going about. The implication from some corners is that those who sell silver as a hedge borrow it from existing physical supply, drawing down physical stocks. What they do not realize, or admit, is that borrowed silver is not held as allocated and discrete collateral in any system with which I am familiar, but is at best resold again into the bullion markets, if it ever experiences any movement at all beyond some multiple ledger entries.

The dirty little story of the metal markets is leverage and fractional ownership, not always disclosed, which some say is as high as 100 to 1. And this is in the so called physical bullion markets like the LBMA. I could not even imagine how badly mispriced the counter party risk is in the hedges. But when the music stops and the tide goes out, we may see who is naked, and there will most likely be a surfeit of some rather ugly bums.

Reuters
US silver term structure inverts as supply tightens
By Frank Tang
February 11, 2011

NEW YORK, Feb 11 (Reuters) - The tightest physical silver supplies in four years have tipped the U.S. silver futures market into backwardation this week, making near-term prices more expensive than more distant months.

Market watchers said that it has been more than 10 years since silver futures were last in backwardation, an unusual term structure, associated with shortage of physical supply. Warehouse stocks of the white metal have dropped to a four-year low on surging demand, while miners have hedged their future production.

Booming industrial demand for silver and record U.S. coin sales, combined with a surge in demand from mining companies to borrow the metal for their hedge programs have led to a squeeze in the physical silver market.

"The problem is that there is great industrial demand for a specific grade of silver, and there is not enough coming fresh from the mines," said Miguel Perez-Santalla, vice president of Heraeus Precious Metals Management.

"The stocks are being pulled for all the high grade and better materials, and that essentially put a squeeze on the physical market," he said.

Perez-Santalla said that silver futures have not been in backwardation since billionaire Warren Buffett bought 130 million ounces of silver between 1997 and 1998.

Backwardation is a condition where cash or nearby delivery prices are higher than the price for delivery dates further in the future. Usually, forward prices are higher than cash prices to reflect the costs of storage and insurance for stocks deliverable at a later date.

"The extent of the backwardation in silver is unprecedented. It suggests that retail investment and industrial demand internationally is very robust and the small silver bullion market cannot cater to the level of demand for refined coin and bar product," bullion dealer GoldCore said in a note on Friday.

Warehouse data from COMEX showed that silver stocks fell to a four-year low at 102.5 million ounces (3,188 tonnes) on Feb. 5, about 30 percent below a peak at over 141 million ounces (4,395 tonnes) in June 2007.

Strong silver coin sales have more than offset outflow from the world's largest silver-backed exchange traded fund iShares Silver Trust (SLV), which notched its biggest one-month drop in its silver holdings in January...

End of Year Window Dressing In the SP 500: 2009-2010 and 2008-2009

I am keeping an open mind on this year's window dressing cycle as to the extent and the timing.

Wall Street desperately wishes to hand off this bubble to mom and pop and foreign hands, but so far the target victims are reluctant to buy in. The standard script is to keep running it higher while protecting your own risks with derivatives. If your derivatives counterparty fails then you obtain public funds to bail out of your losses. The objective is always the same: the public loses.

The Fed and Wall Street *could* conceivably keep this going as they did in the early cycle of housing bubble, or the tech bubble. Never underestimate the recklessness of desperate men caught up in a fraud of their own design. When the suckers start to question the game, double down and act even more resolutely and boldly. The average person will believe because they do not think people are capable of such obvious and blatant deception, since they are not so free of scruples and conscience. And of course greed is a marvellously effective prescription for silence, rationalization, and self-deception.

They may feign ignorance in Washington, New York and London, but they know, and it serves their purpose. This is a classic fraud, not even elegant or complex, but merely clumsy, an obvious abuse of trust and power.  It is as noble and productive as running a protection racket on the neighborhood candy store, and robbing little old ladies for their pension checks.

The only thing that is surprising about Wall Street and the US financial frauds is, as Eliot Spitzer famously observed, their scams and schemes are so simple and so obvious when one can pry back the veil of secrecy and see what is actually being done.   Old frauds never go way; they come back endlessly with minor variations and different shades of lipstick.

How obvious and bold can they be? How about this obvious and bold?

 Setting Your Watch by the Silver Manipulation - WT   

It is called 'running the stops' held by the small specs.  It is an old and treasured fraud on the Street, like running up the prices of stocks and then selling them to the public at the top while you quietly exit with your profits and fees.

On the bright side the metals manipulation seems to be faltering, with silver soaring to new highs as the lack of physical metal for delivery impedes the ability for a few banks to endlessly run their paper ponzi scheme of naked shorting and leverage.

All Ponzi schemes end badly, but timing is everything. While there are overleveraged spec shorts to squeeze and pensions to plunder the money printing and tape painting can continue.  You will run out of real wealth, assets and freedom before they will run out of ink.

PLUNGE! 1987 Style Sudden Drop in US Stocks Driven by Program Trading and a Ponzi Market Structure

“Lasciate ogni speranza, voi ch'entrate."
Dante Alighieri, The Inferno, Canto III, 9

US equities were gripped by panic selling as the Dow plunged almost 1,000 points driven by a cascade of 100 share high frequency program trading, estimated to have been about 80% of volume. Gold rocketed higher to $1,210.

The stock exchange circuit breakers do not effectively apply after 2:30 PM NY time unless the market declines over 20% and they close the exchange for the day.



A bit of a detail perhaps, but it serves to enhance the convenient artificiality of today's market break.

This is highly reminiscent of the 1987 crash driven by a flawed market structure based on automated trading and bad theories.

The entire stock market rally which we have seen this year off the February lows resembles a low volume Ponzi scheme, and formed a huge air pocket under prices.

This US equity rally was driven by technically oriented buying from the Banks and the hedge funds. There was and still is a lack of legitimate institutional buying at these price levels. This was machine driven speculation enabled by the lack of reform in a system riddled with corruption, from the bottom to the top.

This is yet another indication that the US regulatory and market oversight organizations, especially the SEC and CFTC, continue to be disconnected from and remarkably ineffective in their responsibilities in guarding the public against gross market abuse, price manipulation, and insiders playing games with cheap money supplied by the NY Fed.

And as you might expect, the anchors on financial television are trying to excuse and blame the sell off on a 'fat finger' order that caused Procter and Gamble to drop 20 points in 45 seconds. Or a typist inputting an order to sell 16 million e-mini SP futures, and typing "B" instead of "M." Oops. Crashed the free world.

"Ordinarily, the financial risk in a market, and hence the risk to the economy at large, is limited because the assets traded are finite. There are only so many houses, mortgages, shares of stock, bushels of corn, [bars of silver], or barrels of oil in which to invest.

But a synthetic instrument has no real assets. It is simply a bet on the performance of the assets it references. That means the number of synthetic instruments is limitless, and so is the risk they present to the economy...

Increasingly, synthetics became bets made by people who had no interest in the referenced assets. Synthetics became the chips in a giant casino, one that created no economic growth even when it thrived, and then helped throttle the economy when the casino collapsed."

US Congressman Carl Levin

Even if any of this was true, it was just the spark that caused the market to plummet because of its highly unstable and artificial technical underpinnings. There is no longer any legitimate price discovery. The US financial system is a casino, dominated by a few big Banks and hedge funds, the gangs of New York.

They'll never learn. Or is it 'we?' They may not really care.



The Market Makers were doing God's work and maintaining order flow, liquidity, and stability.



The Volatility Index VIX Rocketed



Procter and Gamble ONE Minute Chart



As noted in previous blogs, I have been long gold and short stocks all week. I took those positions off the table in the plunge.

Now we go into the Non-Farm Payrolls report. This is one broken market, and the plunge was no accident, but the consequence of corruption, neglect, and obscenely ineffective political governance and monetary policy. But we might see a bounce on Friday, and quite a bit of official reassurance over the weekend.

Bear in mind that there is a currency crisis on the horizon, and the IMF will be meeting to discuss it next week.

"Sanity ruled on the Stock Exchange Friday in place of the hysteria of Thursday...In its place was a decidedly improved sentiment; the atmosphere had been cleared and a period of normalcy again reigned.

Sentiment was extremely cautious. While most observers believed the worst of the sharp break was over , they did not look for any immediate recovery...It is the general view that nothing more than backing and filling movements can be expected. Then if conditions are favorable, the groundwork can be laid for a new advance later on."

Wall Street Journal, Saturday, October 26, 1929

The pattern of that market dislocation was for an initial decline on Black Thursday (24th), a recovery on Friday (25th), an uneasy or blue Monday (28th), and then the Great Crash itself on Black Tuesday, October 29, 1929.

But even then, with the market down about 40%, it had a remarkable distance to go. The bottom in US equities was finally reached, down 90% from the September 1929 top, in July of 1932, the trough of the Great Depression.

I am not saying that this will happen again. It turned out very differently in 1987 thanks to a flood of liquidity from the Greenspan Fed. Can Bernanke do the same thing again? One great difference between now and 1929 is that a fiat currency can be devalued, and enormous amounts of liquidity added, with a few phone calls. The Fed is already under pressure to open new dollar swaplines with the ECB. Central banks have the mechanisms of monetizing each others debt, but would generally choose to do so quietly to maintain 'confidence' which is their stock in trade.

But it is good to remember that caution is advisable when investing - always, but especially when one decides to exercise their greed reflex.

"Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even.”

Richard M. Salsman

"My Son...Went Inside There And Basically Saw that the Vault was Empty."

Every day when I think I am going to get a day off from this story, some revelation seems to come out, each as compelling, shocking, and suspicious as the others, but all fitting together in what looks like a nasty picture of reckless behaviour gone wrong developing.

Apparently some banks and brokers had been selling gold and silver which they do not have. We know it happens because Morgan Stanley was caught doing it, and was even charging storage fees from unsuspecting investors.

Do these banks not have auditors? Are the regulators sweeping this under the rug? Are the insiders and their spokespeople correct in just dismissing this as a problem, as was done with the subprime market even by Ben Bernanke himself before it collapsed into a bank run that shocked the financial system?

Now, we have to carefully distinguish between allocated metal, in which one holds a certificate and are assured of a firm ownership of actual metal, and an unallocated holding in which you hold basically a paper claim on metal, for which you may be an unsecured creditor, even if you are paying regular storage fees. But in the cases I am hearing about it is a firmly stated ownership of something that does not exist, and cannot be obtained at current prices.

This is important because although there is always shorting, and some fractional reserve aspect to all banking , even in the case of bullion banking, in this case the proportion or leverage of the selling of the assets starts to look more like a Ponzi scheme than a rational and efficient market. There is a point at which 'speculation' becomes fraud, and the fraud becomes large enough to start risking the health of the bank.

And in our under-regulated and excessively leveraged financial system, that becomes a problem because it all looks to be a pyramid scheme of sorts. JPM alone is holding derivatives with notional values approaching a very large portion of World GDP.

The banks seem to be pointing to bullion supplies elsewhere, such as the LBMA in London, or in this case Hong Kong, and saying, "See if certificate holders demand their bullion, we can easily fulfill their requests." The problem with this is that it appears that they are ALL doing this, overleveraging their supplies, becoming counterparties and potential sources of supply to each other, with few having a full supply of what they say they have.

Make what you will of this. It is important to understand what is stated by the bank or institution on the certificate for bullion that you hold. As outlined above, you might just be an unsecured creditor to an unallocated account. There is no fraud in that, only a risk of actual delivery should you ever ask for it.

I am sure more will be coming out, eventually. But for now this information is barely penetrating the radar of the mainstream media. These fellows may be wrong, but so far no one is denying specifically what they are saying with any persuasive proof. They just seem to be hiding behind secrecy and opaque transactions, saying 'Prove it, prove it.'

As I have stated before, the problem I have with this is the lack of transparency and auditing in these markets, which makes them absolutely ripe for fraud and excessive leverage by the usual suspects in the TBTF banks.

This seems to be exactly what caused the subprime crisis and the bank run in 2008: a lack of liquidity and the mispricing of risk. How can one not be suspicious? We have just seen it happening, even though the herd behaviour is to simply ignore it because it is too alarming, too inconvenient.

Let the truth come out. Let justice be done.

Have we learned nothing?

Capital Flight: A Plunge in Foreign Capital Inflows Preceded the Break in US Financial Markets

The peak of foreign capital inflows into the US was clearly seen in the second quarter of 2007, just before the crisis in the US that has rocked its banking system and driven it deeply into recession.

Are the two events connected? Had the US become a Ponzi scheme that began to collapse when new investment began to wane, and the growth of returns could not be maintained?

Watch the dollar and the Treasury and Agency Debt auctions for any further signs of capital flight, which is when those net inflows of foreign capital turn negative. And if for some reason the unlikely happens and it gains momentum, the dollar and bonds and stocks can all go lower in unison, and there is no place to hide except perhaps in some foreign currencies and precious metals.

The sad truth is that US collateralized debt packages and their derivatives have become toxic in the minds of the rest of the world, and there is little being done to change that, except an orderly winding down of the bubble, with the remaining assets being divided largely by insiders, and not price discovery and capital allocation mechanisms centered by the 'invisible hand of the markets.'



Unfortunately the Net Inflow Data is quarterly, and subject to revisions. But we have to note that the spectacularly rally off the bottom in the SP 500, not fully depicted above, is not being matched by a return of foreign capital inflows.

If that inflow does not return, if the median wage of Americans does not increase, if the financial system is not reformed, if the economy is not brought back into balance between the service and manufacturing sectors, exports and imports, then there can be no sustained recovery in the real, productive economy.

The rally in the US markets is based on an extreme series of New Deal for Wall Street programs from the Fed and the Treasury, monetization, and the devaluation of the dollar.

The Man Who Exposed Madoff Cites Government Complicity in Fraud

This is only the tip of the iceberg, but even it may never be seen.

We ask now why the economists and regulators and media said little or nothing while the frauds and bubbles were developing, then.

But what are they saying now, about the new frauds, and injustices, and the blatant manipulation of the markets wherein some traders turn in financial results that are improbable to produce without inside information and breaking the rules?

A few heroes speak out, but most of the intellectual leadership cower in the shadows, asking 'Where is the outrage?' And the media baits the crowd with this or that distraction, and inflames them to think whichever way it pleases.

Here is an audio interview with Harry Markopolos in which he gives his views on the Federal Reserve as a regulator, financial reform, and the 'recovery.' Harry Markopolos Interview with King World News

Let us start here, and now, to demand the change required. Let us begin by auditing the Fed, and refusing to tolerate the granting of more regulatory power to an institution spawned in a deception in 1913, and at the heart of so many of our financial crises ever since. The Creature from Jekyll Island: A Second Look - G. Edward Griffin (2007)

As of yet, nothing has changed. The silence is deafening.


AFP Interviews Harry Markopolos

...In May of 2000, he submitted an 8-page report to the Boston Regional Office of the Securities Exchange Commission (SEC) listing red flags and mathematical proof of a major fraud but got no reply. He re-submitted his evidence to the Boston and other SEC offices in 2001, 2005, 2007 and 2008, to no avail. By this time, Markopolos was realizing that Madoff had been operating with protection from the inside.

In late 2008, when the stock market crumbled and investors rushed in to redeem their investments, Madoff ran out of cash, turned himself in to authorities, and pleaded guilty in federal court last March 12th.

Markopolos said that all the members of his team feared for their lives during the long investigation and he for more reason than any of the others because of his visibility. He was the one who was submitting all the complaints each year, and he knew that any leak from the SEC could make him a marked man.

He explained that the “offshore feeder funds” were only one step removed from organized crime. “If organized crime knew that Madoff was stealing their money, he would have been killed. Therefore, if Madoff had ever found out that we had a team tracking him through Europe and North America and that he risked getting exposed, it was a good bet that he would have had several billion reasons to want us silenced first. To compartmentalize the damage, I was the only one who went to the SEC.”

No one there knew Markopolos had an assisting team in the field. But Markopolos has proof that the SEC was culpable, too, and says publicly that he has tremendous anger at the agency and sadness for the victims. He says that there were SEC lawyers who were “in bed with Madoff ” and helped destroy lives.

“Madoff paid people to look the other way,” says Markopolos and reminds us that there is a federal report scheduled to come out by the end of the year. He emphasizes that unless there is a cover-up, “the SEC will cease to exist...”

The Credit Bubble Was a Ponzi Scheme Enabled by the US Dollar

They say a picture is worth a thousand words.

Here is a picture of the US credit bubble, with the deleveraging which has just begun.

It is/was a Ponzi scheme, enabled by the advantages of controlling the reserve currency of the world, pure and simple.



It was the US dollar that was monetized, or more specifically US debt obligations, which are now substantially worthless and will have to take a significant haircut in real terms. This is similar to the Japanese experience in which they monetized their real estate.

Ironically, those expecting this deleveraging to result in a stronger dollar could not be more mistaken. The Obama Administration is scrambling to obtain relief from Europe and Asia, getting them to inflate their own currencies through 'stimulus,' in order to continue to hide the unalterable truth - the US must partially default on its debt as expressed in the dollar and the Bond.

This is the inevitable outcome of all Ponzi schemes. Several smaller, private schemes already have collapsed. The big one is yet to come down. And when it does, the foundations of democracy will shake, several governments will fall, and we will once again experience the kind of uncertainty more familiar to those who lived in the first half of the twentieth century.

The sad truth is that the Obama Administration has barely begun the real work of rebuilding the economy. Everything to date is simple looting, paper-hanging, and the rewriting of history.

Until the median wage improves significantly in real terms, and the economy is put back on a productive basis without relying on the unsupported expansion of credit, there will be no recovery, merely sound byte opportunities for the smoke and mirror crowd.

This is the reality.

Caveat Emptor - Buyer Beware - In Times of General Corruption

Here are some excerpts from the Op-Ed piece by Michael Lewis and David Einhorn that appeared in the NY Times on Saturday.

It is a portrait of government in partnership with a corrupt financial system, in a remarkably cynical and materialistic age, generally ignored by a frightened and complacent people.

And where was the outrage? Where was the rest of the world? Turning a blind eye to the corruption and enjoying the returns. Like many of Madoff's enablers and investors they thought they were insiders, the smart ones, and saw only the gains, ignoring the rest, and the eventual outcome.

This is not an historical review, as the problems still remain, a little exhausted, but largely uncorrected. No confessions of guilt, just denials, excuses, diversions and coverups.

Caveat Emptor. Buyer beware.


NY Times
The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN
January 3, 2009

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street...

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness...

Our financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense...

Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest...

Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become. Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors.

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

It's not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it...

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival...

Madoffed: Dr. Doom of Solly's Heyday

Economist may be latest hurt in Madoff scheme
Wed Dec 31, 2008 6:05am GMT

(Reuters) - A prominent Wall Street economist... the latest people to have lost money on investments connected to accused swindler Bernard Madoff, according to media reports.

Economist Henry Kaufman lost several million dollars, which he had in a brokerage account with Bernard L. Madoff Investment Securities for more than five years, the Wall Street Journal said, citing Kaufman in an interview on Tuesday.

The president of financial consulting firm Henry Kaufman & Co said his Madoff loss was no more than a couple of percent of his entire net worth and immaterial to his financial well-being, the paper said.

Kaufman became known for correctly forecasting higher inflation and interest rates when he was chief economist with Salomon Brothers in the 1970s and 1980s, when he acquired the moniker "Doctor Doom."

The Fuel for a Speculative Rally but Not a Recovery

At some point we may stop confusing asset bubbles with economic growth.

In the meantime, we might expect the shallow and immature stewardship of the economy to continue, unreformed and unconstrained. We may get quite a bear market rally in the first quarter of 2009. Whether it is the bottom or a bottom will remain to be seen.

Without a sustained increase in the median hourly wage and significant reform in the financial system and a sustainable construct for international currency exchange and trade there can be no sustained recovery in the real economy.

Excess liquidity and a corrupt financial system provides the fuel for a speculative rally, but it is also the fuel for a greater crisis to come, the longer we maintain this monetary charade. The Fed is pouring gasoline on damp wood.

Still, we ought not to underestimate the power of the Fed, having recently witnessed a counter trend reflationary rally after the Crash of 2000-2 that lasted three years and reached new stock market highs, and a housing bubble that almost crashed the world economy. They appear to have a lot of fuel, from a variety of unconventional sources, and Bernanke has the willingness to use it.

Cash at 18-Year High Makes Stocks a Buy at Leuthold
By Eric Martin and Michael Tsang

Dec. 29 (Bloomberg) -- There’s more cash available to buy shares than at any time in almost two decades, a sign to some of the most successful investors that equities will rebound after the worst year for U.S. stocks since the Great Depression.

The $8.85 trillion held in cash, bank deposits and money- market funds is equal to 74 percent of the market value of U.S. companies, the highest ratio since 1990, according to Federal Reserve data compiled by Leuthold Group and Bloomberg.

Leuthold, Invesco Aim Advisors Inc., Hennessy Advisors Inc. and BlackRock Inc., which together oversee almost $1.7 trillion, say that’s a sign the Standard & Poor’s 500 Index will rise after $1 trillion in credit losses sent the benchmark index for American equities to the biggest annual drop since 1931. The eight previous times that cash peaked compared with the market’s capitalization the S&P 500 rose an average 24 percent in six months, data compiled by Bloomberg show.

“There is a store of cash out there that is able to take the market higher,” said Eric Bjorgen, who helps oversee $3.4 billion at Leuthold in Minneapolis. “The same dollar you had last year buys you twice as much S&P 500 as it did a year ago.”

Leuthold Group, whose Grizzly Short Fund returned 83 percent in 2008 thanks to bets against equities, said in its December bulletin to investors that stocks offer “one of the great buying opportunities of your lifetime...”

The ratio of cash on hand to U.S. market capitalization jumped 86 percent in the first 11 months of the year, the biggest increase since the Fed began keeping records in 1959, as the U.S., Europe and Japan fell into the first simultaneous recessions since World War II.

So-called money of zero maturity, the central bank’s measure of U.S. assets available for immediate spending, is mostly held by households, according to Richard G. Anderson, an economist at the Federal Reserve Bank of St. Louis....

Any recovery will depend on a rebound in corporate profits and the economy after $30 trillion was wiped out from world equities this year, according to Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. (At that's the rub, a speculative rally fueled by excess liquidity will fizzle and die if it is not accompanied by a recovery in real corporate profits, and that depends on an increase in consumption that is not dependent on additional consumer debt - Jesse)

Jobless claims reached a 26-year high this month, while economists surveyed by Bloomberg estimate household spending will fall 1 percent next year, the most since the aftermath of the attack on Pearl Harbor. A 13 percent slump in the median home resale price in November from a year earlier was likely the largest since the 1930s, the National Association of Realtors said last week, damping speculation the housing market is close to a bottom.

‘Biggest Cannon’

Analysts estimate profits at S&P 500 companies will shrink 10.3 percent in the first three months of 2009 and 5.8 percent in the second quarter, bringing the stretch of earnings declines to a record eight quarters, Bloomberg data show. Gross domestic product will contract in the first half of the year before growth resumes in the third quarter, according to a Bloomberg survey of economists.

“The fuel supply is there, but people have to have a reason to use it,” said Dickson, who helps oversee about $19 billion. “The Fed fired the shot out of the biggest cannon they know. Now the question is, will it hit the right mark?”

This year’s slump has left S&P 500 companies valued at an average of 12.6 times operating profit, the cheapest since at least 1998, monthly data compiled by Bloomberg show...

The last time cash accounted for a larger proportion of market value was 1990. The ratio peaked at 75 percent in October of that year, after the savings and loan industry collapsed, Drexel Burnham Lambert Inc. was forced into bankruptcy and the U.S. fell into a recession. The S&P 500 rallied 23 percent in six months and almost 30 percent in a year...

Dancing on a Precipice: The Tenuous Balance in Global Finance

“If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.” Jean Paul Getty

We imagine J. Paul Getty would probably like to update that quotation to billions if he were still alive. We knew some people who subscribed to this notion that you keep borrowing until you gain a measure of control over your banks, since your default would be so painful to them. It is a tool of financial engineering roughly related to a passive form of extortion, a long con.

Here is an extended quote from a 29 December 2008 essay by Brad Setser titled The collapse of financial globalization...

"Both private capital inflows to the US and private capital outflows from the US have fallen sharply. They have gone from a peak of around 15% of US GDP to around zero in a remarkably short period of time …

Direct investment flows have continued. Other financial flows though have largely gone in reverse, with investors selling what they previously bought. In the third quarter foreign investors sold about $90b of US securities (excluding Treasuries) and Americans sold about $85 billion of foreign securities. And the reversal in bank flows on both sides (as past loans have been called) has been absolutely brutal.

This sharp fall has bearing on the bigger debate over the role global capital, global savings and foreign central banks played in helping to to create the conditions that allowed US households to sustain a large deficit for so long — and whether American and other policy makers should have paid more attention to the risks that came with the surge in foreign demand for US financial assets earlier this decade...

I think we now more or less know that the strong increase in gross capital inflows and outflows after 2004 (gross inflows and outflows basically doubled from late 2004 to mid 2007) was tied to the expansion of the shadow banking system.



It was a largely unregulated system. And it was largely offshore, at least legally. SIVs and the like were set up in London. They borrowed short-term from US banks and money market funds to buyer longer-term assets, generating a lot of cross border flows but little net financing. European banks that had a large dollar book seem to have been doing much the same thing. The growth of the shadow banking system consequently resulted in a big increase in gross private capital outflows and gross private capital inflows... (Hence the subsequent spike in the value of the dollar from the eurodollar short squeeze we have recently seen - Jesse)

Why didn’t the total collapse in private flows lead financing for the US current account deficit to dry up? That, after all, is what happened in places like Iceland — and Ukraine.

My explanation is pretty straightforward.

Central banks were the main source of financing for the US deficit all along. Setting Japan aside, the big current account surplus countries were all building up their official reserves and sovereign funds — and they were the key vector providing financing to the deficit countries."

The implications of this are rather profound. The much touted notion that the US is the preferred destination for private wealth, thus sustaining an out of balance trade deficit through a financial services economy, is rubbish at best, and propaganda at worst. It is rooted in the Dick Cheney nostrum that "Reagan proved that deficits don't matter."

What we have today is a very lopsided vendor financing arrangement, wherein the US is largely supported by China and Japan whose industrial policy currently recommends their support of a US debt that is increasingly unpayable.

If and when China and Japan are no longer able to support the continued growth of US deficit financing, the dollar and the bonds will contract (decrease) in value, and perhaps precipitously, like a house of cards. It is much worse than we had imagined, and more concentrated on these two countries, along with Saudi Arabia, than we had thought.

For now the balance is maintained because of self-interest and fear. But we cannot stress enough the highly artificial nature of the arrangement, and its inherent instability, now that the charade of sustained private investment flow is shown for what it is. There is no economic theory to support this model other than a distorted form of neo-colonial parasitism. Substitute US paper dollars for opium and you get the idea.

Japan and Saudi Arabia are understandable as virtual client states under US military protection, but we struggle with how China was taken into this arrangement which is so potentially destabilizing of their internal political and economic stability.

This is why the world has not developed a sound replacement for the dollar hegemony. It is because if they do, they must navigate around the probability, not possibility, of a collapse of their dollar reserves, and a dislocation of their own export driven economies, much worse than we might have imagined. It is not a matter of economic inventiveness; it has become a matter of will.

Who will be the first to flinch? History shows it is rarely a conscious decision, but rather some incident, an accident, some trigger event, even one so small, that it creates astonishment at the size of the avalanche it unleashes.

To make it clear and simple, this is the first evidence we have seen to suggest that hyperinflation is in fact possible in the US. As you know, we have been strongly adverse to the extremes in outcomes, both in terms of a sustained deflation and a significant hyperinflation.

That has now changed. The dollar is a Ponzi scheme, the waters of debt are overflowing the dam of artificial support, and only a few countries, two of them somewhat unstable, are holding back the deluge.

Ponzi Nation

America has become more a debt 'junkie' - - than ever before
with total debt of $53 Trillion - - and the highest debt ratio in history.

That's $175,154 per man, woman and child - - or $700,616 per family of 4,
$33,781 more debt per family than last year.

Last year total debt increased $4.3 Trillion, 5.5 times more than GDP.
External debt owed foreign interests increased $2.2 Trillion;
Household, business and financial sector debt soared 7-11%.

80% ($42 trillion) of total debt was created since 1990,
a period primarily driven by debt instead of by productive activity.

And, the above does not include un-funded pensions and medical promises.

America's Total Debt Report - Grandfather's Economic Series

Since a picture is 'worth a 1000 words" here are a few charts for your consideration.

In a simple handwave estimate, one might say that the debt will have to be discounted by at least half. That includes inflation and selective defaults. The seductiveness of this chart is that things have continued on in their frenzied pace for so long, it seems like the norm. That is always a problem with chronic drunks and addicts; they rarely know when to quit, or can't, until they really hit the wall.



Nine out of ten Americans might understand that when the growth of your debt outrageously outstrips your income for so long, that something has got to give. The givers will most likely be all holders of US financial assets, responsible middle class savers, and a disproportionate share of foreign holders of US debt.



While the debtors hold the means of payment in dollars and the power to decide who gets paid, where do you think the most likely impact will be felt?

This is not intended as a rant, a screed in the pejorative sense, or anything else but a reasoned diagnosis based on the data as we find it.

We could be wrong, and we hope we are. Show us better data. The prognosis is not optimistic.

Here is a view of the debt data that is "optimistic" if you are willing to ignore the relative historic context and the huge amount of debts that are off the Federal balance sheet.



A dismissive reaction to this kind of forecast is understandable.

The doctor is always viewed as a 'party pooper' and a gloomy sort when he informs the uber-alpha hard drinking, stress generating, self-medicating, recreational drug=binging forty-something patient that their shortness of breath is emphysema, their blood pressure is soaring as quickly as their self-absorption, and that chest discomfort is a warning sign of a rapidly developing heart problem that could be a deal breaker if they do not change their lifestyle.

But, like most prognostic warnings go, it will be ignored with the dawn of a new day, a successful if awkward commute to work, and the anticipation of another evening's delight and binges yet to come. Until they don't.

It might be a good idea not to be a passenger with a recklessly self-destructive debt junkie at the wheel of your financial assets. Unless you are c0-dependent like Saudi Arabia, China and Japan or are one of the kids in the backseat. Then you have some serious decisions to make.

In the meantime buckle up, because Uncle Sugar-Daddy still has the keys to the car.

A Question Worth Considering for the New Year...

What is at the heart of the US financial crisis?

Is it that the US has been precipitously cut off from some foreign source of funding? Has there been an oil embargo, a supply shock imposed such as the one that triggered the financial crisis of the 1970's? Are the problems caused by some external change, some actor outside the system?

I think most will say the answer is 'no.' The problems are internal to the US, to its financial system.

So, how would you fix a system that has broken from an internal flaw in this way? Try more of the same, business as usual, apply fresh debt to a failed system based on a growing pyramid of debt without making any substantial changes?

The US financial system, the housing, equity and Treasury markets, are all Ponzi schemes, with the need for a constantly increasing source of fresh money to keep going. That funding is new debt, new dollars based on nothing produced, just the trust and confidence of the participants.

Would you fix the Madoff Ponzi scheme by giving Bernie more money, public money, to keep his payments flowing to his 'investors?'

I think most of us would say, no, no more money.

But what is the difference between that and what Paulson and Bernanke are doing today? Is there a graceful exit strategy? Have any serious reforms or changes been made or even proposed? Has there even been a frank disclosure and discussion of exactly what happened, and what is continuing to happen, beyond blaming the victims, or cynically hiding behind 'well that's how things are?'

No. The key participants in the Ponzi scheme are continuing to take their gains out, in dividends and bonuses, front running the final collapse and admission that "its all gone; we're bankrupt."

Think about it.

What would you do if it is a Ponzi scheme, teetering on the edge?

Former NASDAQ Chairman Charged in $50 Billion Ponzi Scheme

"Do you know where your money is?"


Bernard L Madoff Investment Securities is the 23rd largest market maker on the Nasdaq for hedge funds and banks handling about 50 million shares per day.

The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.

Their Financial Advisory Business is separate from their market-making business with approximately 20 customers.

The $50 billion in confessed total losses does not quite square up with $17 billion under management at the advisory firm, even in these heady days of leverage.

Where and when is the unidentified loss of $33 billion going to hit?

Naked shorts which cannot be covered? Levered positions that are now vaporized?

Who are the twenty or so customers of the Financial Advisory business?

Who was his auditor? Who in the NASD knew about this? Who was handling his back office work?

Is the ghost of Richard Whitney walking the floor of the Exchange tonight?

cf. Richard Whitney, President of the NYSE 1930-35

Richard Whitney Warning Against the Securities Act of 1934 - Video

Securities and Exchange Commission
SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme
FOR IMMEDIATE RELEASE
2008-293

Washington, D.C., Dec. 11, 2008 — The Securities and Exchange Commission today charged Bernard L. Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm. The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.

The SEC's complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion. (From 17 billion under management? Offer him the position of Treasury Secretary. This guy is a financial genius! - Jesse)

"We are alleging a massive fraud — both in terms of scope and duration," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable."

Andrew M. Calamari, Associate Director of Enforcement in the SEC's New York Regional Office, added, "Our complaint alleges a stunning fraud that appears to be of epic proportions."

According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

Madoff founded the firm in 1960 and has been a prominent member of the securities industry throughout his career. Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market's board of governors and its executive committee and served as chairman of its trading committee.

The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. In addition to emergency and interim relief, the SEC seeks a final judgment permanently enjoining the defendants from future violations of the antifraud provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.

The SEC's investigation is continuing.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York.

Too Big to Jail

"Among a people generally corrupt, liberty cannot long exist."
Edmund Burke

Although Nassim Taleb makes some excellent points he is a bit narrow in his analysis because of his superior knowledge and experience in a highly specific area of the crisis, which in some ways is a broader cultural crisis.

There may be enough fraud involved in the US over the past twenty years for multiple prosecutions under the RICO statutes. Or it just may be the end result of a general breakdown in morals, from the top down by example perhaps.

One does find some institutions appearing as enablers at the heart of every crisis, from LTCM to Enron to the Accounting Frauds to the Tech Bubble to the Credit Bubble.

No, this was worse than the silence of the witnesses to the assault of Kitty Genovese that gave the label to the bystander effect.

In this case there were 'bystanders' who financially benefited from the assault and who not only kept quiet but actively intimidated and silenced other bystanders through ridicule and fear of retribution. But there are also many who simply did not care then and will not care once the markets rally once again. This is the sad commentary on a nation corrupted by easy money.

There were many bystanders who did call 911 and were ignored because those in the enforcement chain were either asleep on the job or had other competing interests.

The practical problem is that the institutions involved are probably too big to jail.

That is their strength, but ironically also their weakness.


The Financial Times
Bystanders to this financial crime were many
By Nassim Nicholas Taleb and Pablo Triana
December 7 2008 19:18

...Not surprisingly, the Genovese case earned the interest of social psychologists, who developed the theory of the “bystander effect”. This claimed to show how the apathy of the masses can prevent the salvation of a victim. Psychologists concluded that, for a variety of reasons, the larger the number of observing bystanders, the lower the chances that the crime may be averted.

We have just witnessed a similar phenomenon in the financial markets. A crime has been committed. Yes, we insist, a crime. There is a victim (the helpless retirees, taxpayers funding losses, perhaps even capitalism and free society). There were plenty of bystanders. And there was a robbery (overcompensated bankers who got fat bonuses hiding risks; overpaid quantitative risk managers selling patently bogus methods).

Let us start with the bystander. Almost everyone in risk management knew that quantitative methods – like those used to measure and forecast exposures, value complex derivatives and assign credit ratings – did not work and could provide undue comfort by hiding risks Few people would agree that the illusion of knowledge is a good thing. Almost everyone would accept that the failure in 1998 of Long Term Capital Management discredited the quantitative methods of the Nobel economists involved with it (Robert Merton and Myron Scholes) and their school of thought called “modern finance”. LTCM was just one in hundreds of such episodes.

Yet a method heavily grounded on those same quantitative and theoretical principles, called Value at Risk, continued to be widely used. It was this that was to blame for the crisis. Listening to us, risk management practitioners would often agree on every point. But they elected to take part in the system and to play bystanders. They tried to explain away their decision to partake in the vast diffusion of responsibility: “Lehman Brothers and Morgan Stanley use the model” or “it is on the CFA exam” or, the most potent argument, “modern finance and portfolio theory got Nobels”. Indeed, the same Nobel economists who helped blow up the system at least once, Professors Scholes and Merton, could be seen lecturing us on risk management, to the ire of one of the authors of this article. Most poignantly, the police itself may have participated in the murder. The regulators were using the same arguments. They, too, were responsible.

So how can we displace a fraud? Not by preaching nor by rational argument (believe us, we tried). Not by evidence. Risk methods that failed dramatically in the real world continue to be taught to students in business schools, where professors never lose tenure for the misapplications of those methods. As we are writing these lines, close to 100,000 MBAs are still learning portfolio theory – it is uniformly on the programme for next semester. An airline company would ground the aircraft and investigate after the crash – universities would put more aircraft in the skies, crash after crash. The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen.

Bystanders are not harmless. They cause others to be bystanders. So when you see a quantitative “expert”, shout for help, call for his disgrace, make him accountable. Do not let him hide behind the diffusion of responsibility. Ask for the drastic overhaul of business schools (and stop giving funding). Ask for the Nobel prize in economics to be withdrawn from the authors of these theories, as the Nobel’s credibility can be extremely harmful. Boycott professional associations that give certificates in financial analysis that promoted these methods. Remove Value-at-Risk books from the shelves – quickly. Do not be afraid for your reputation. Please act now. Do not just walk by. Remember the scriptures: “Thou shalt not follow a multitude to do evil.”

Citigroup and Key Officers including Prince and Rubin Named in Suit Charging Fraud

NY Post
'PONZI SCHEME' AT CITI
By PAUL THARP
December 4, 2008

A new Citigroup scandal is engulfing Robert Rubin and his former disciple Chuck Prince for their roles in an alleged Ponzi-style scheme that's now choking world banking.

Director Rubin and ousted CEO Prince - and their lieutenants over the past five years - are named in a federal lawsuit for an alleged complex cover-up of toxic securities that spread across the globe, wiping out trillions of dollars in their destructive paths.

Investor-plaintiffs in the suit accuse Citi management of overseeing the repackaging of unmarketable collateralized debt obligations (CDOs) that no one wanted - and then reselling them to Citi and hiding the poisonous exposure off the books in shell entities.

The lawsuit said that when the bottom fell out of the shaky assets in the past year, Citi's stock collapsed, wiping out more than $122 billion of shareholder value.

However, Rubin and other top insiders were able to keep Citi shares afloat until they could cash out more than $150 million for themselves in "suspicious" stock sales "calculated to maximize the personal benefits from undisclosed inside information," the lawsuit said.

The latest troubles for Rubin, Prince and others emerged in a 500-page investigation by Citigroup investors represented by law firm Kirby McInerney.

The probe was used to amend and add new details to a blanket investor lawsuit filed against Citigroup a year ago. The amended suit called the actions of Citi leaders "a quasi-Ponzi scheme" to hide troubles - and keep Citi stock afloat while insiders unloaded about 3 million shares between Jan. 1, 2004 and Feb. 22, 2008 for huge profits.

In addition to Citigroup, Rubin and Prince, the complaint names Vice Chairman Lewis Kaden, ex-CFO Sallie Krawcheck and her successor CFO Gary Crittenden.

Rubin cleared $30.6 million on his stock sales, while Prince got $26.5 million, former COO Robert Druskin got nearly $32 million and former Global Wealth Management unit chief Todd Thomson got $25.7 million, the suit said.

Citi denied the allegations and said it "will defend against it vigorously."