Fed and Treasury Irate at NY Bank Regulator's Vulgar Display of Public Diligence with Standard Chartered

Spitzer: If they shut me up, who'll take my place?

Lawsky: I will

The NY Banking regulators clearly do not understand the regulatory 'hands off' philosophy of Treasury and the Fed towards the pampered princes of finance and the privileged few.

This was supposed to have been privately settled amongst gentlemen with a gentle wristslap and a thorough coverup.

And of course this exposes the Federal government and their financerati as utter hypocrites, especially when they are stoking the fires of conflict.

Only the little people are meant to suffer for their country. For the favored few, everything is just another law-bending, money making opportunity.

Some of the wording in this is priceless, especially considering the extent of what the Bank had done and with whom.

I won't be holding my breath for the US regulators to clean up their own manipulated markets and privileged insiders. It might muss someone's ruffled sleeves and Presidential cufflinks.

Liberty and justice -- for some.

Reuters
Exclusive: Regulators irate at NY action against StanChart
By Carrick Mollenkamp and Emily Flitter and Karen Freifeld
August 8, 2012

NEW YORK/LONDON (Reuters) - The Treasury Department and Federal Reserve were blindsided and angered by New York's banking regulator's decision to launch an explosive attack on Standard Chartered Plc over $250 billion in alleged money laundering transactions tied to Iran, sources familiar with the situation said.

By going it alone through the order he issued on Monday, Benjamin Lawsky, head of the recently created New York State Department of Financial Services, also complicates talks between the Treasury and London-based Standard Chartered to settle claims over the transactions, several of the sources said.

Lawsky's stunning move, which included releasing embarrassing communications and details of the bank's alleged defiance of U.S. sanctions against Iran, is rewriting the playbook on how foreign banks settle cases involving the processing of shadowy funds tied to sanctioned countries.

In the past, such cases have usually been settled through negotiation - with public shaming kept to a minimum.

In his order, Lawsky said Standard Chartered's dealings exposed the U.S. banking system to terrorists, drug traffickers and corrupt states.

But the upset expressed by some federal officials, who were given virtually no notice of the New York move, may provide ammunition for Standard Chartered to portray the allegations as coming from a relatively new and over-zealous regulator...

Read the rest here.

CFTC Said to "Drop" Four Year Investigation Into Silver Just Before Promised Release

CFTC To Investing Public: 'Drop Dead.'

This leak to the FT *could* just be a 'trial balloon' by Mr. Gensler and his crew to see if they can get away with it. But that seems more like the plot of a novel.

This could be one of the best examples of the credibility trap in action. The government regulators can say nothing because of their government's long complicity.

If the CFTC in fact does 'drop' the investigation without presenting findings, one could consider that a slap in the face of the American public which on the whole asked for the investigation to be done in the first place, by the regulators who purportedly are hired and paid to serve their interests.

Given the recent admissions about widespread manipulation in LIBOR, the timing of this outcome to the CFTC invesigation could hardly be more arrogant and high-handed, and designed to put the investing public in their places.  It will certainly not inspire any confidence in the integrity of the markets and their regulation.

It would probably be unwise for the investing public to accept this outcome without presenting some consequences.

I suggest that a mass cancelling of futures trading accounts and the withdrawal of all funds deposited there might be a step in the right direction.

Given the serial criminality that has been exhibited in the US futures markets, that action might be long overdue on the basis of common sense.

Financial Times
Four-year silver probe set to be dropped
By Jack Farchy in London and Gregory Meyer in New York
August 5, 2012 10:00 pm

A four-year investigation into the possible manipulation of the the silver market looks increasingly likely to be dropped after US regulators failed to find enough evidence to support a legal case, according to three people familiar with the situation.

The Commodity Futures Trading Commission first announced that it was investigating “complaints of misconduct in the silver market” in September 2008, following a barrage of allegations of manipulation from a group of precious metals investors.

In 2010, Bart Chilton, a CFTC commissioner, said that he believed there had been “fraudulent efforts” to “deviously control” the silver price.

But after taking advice from two external consultancies, the first of which found irregularities on certain trading dates that it believed deserved more analysis, CFTC staff do not have sufficient evidence to bring a case, according to the people familiar with the situation...

Read the rest here.

Official Corruption in Russia: The Torture and Death of Sergei Magnitsky

"Justice in these circumstances turns into a process of grinding human flesh, making mincemeat for prisons and camps. It is a process in which people can neither effectively defend themselves, or even realize what is happening to them. One can only think about when it will end."

Sergei Magnitsky

I know this is going to upset some people, including some that I like and respect. But it needs to be said.

There is quite a bit of romantic talk going around these days about what it is like living and doing business in Russia and China.

Although I have not personally been in Russia since the 1990's I do keep in touch with people I have known there. Less so for mainland China I regret.

Even in the 90's, during the breakdown and collapse of the ruble, and the wild west rise of the oligarchs and Mafia, if you were a pampered guest of the power brokers things could look pretty good, at least on the surface.

This is an old, old story. Life is always good at the top, and people see what they wish to see. If you do not believe this, read the accounts of visiting journalists at the Berlin Olympics of 1936.

Oligarchies are by their very nature corrupt. And the brutality and indifference to human rights that marks a government by dictatorship, of the supremacy of state power whether it is of the left or of the right, does not change all that much when it takes on the more finely tailored veneer of oligarchic capitalism. They just become more concerned about image.

Whatever one wishes to call it, crony capitalism, or to a greater degree state fascism, is still a system of the few exploiting the many, and enforcing their will with increasingly brutal repression as needed, just using different language and methods from time to time, and place to place.

People who believe in sustained, benevolent dictatorships are wonderfully self-deluded.  Or just rooting for 'the home team.'

Oh yes, I know, this story of what happened to Sergei Magnitsky was just the act of a few rogue policemen, and government and court officials.  Unfortunate, but nothing to see here, move along.

Fascism is corporatism, state sanctioned crony capitalism if you will, plus murder.

Even early on, as he was being lionized by his fawning corporate supporters in the West, Mussolini was little more than a brutal, narcissistic gangster and violent thug.

I am not saying that from a purely practical standpoint one cannot do business with or invest in any type of government, not at all. And some of the former dictatorships, or more properly captive states whom the West abandoned, of Eastern Europe that are now free are wonderful places to visit and do business. Even during their transition phase, which could be a little dicey, the difference was marked. Although again, it is not the same as home, and one must make allowances.

One can do business almost anywhere. Even a relatively small player such as myself has done it, I have had business dealings in well over fifty countries in my own modest corporate career. And because of the nature of what I did, providing communications to news agencies, multinational corporations, and a variety of official entities, not every place was cordial or safe.

But have no illusions. Not everyplace is the same, and not every corruption rises to the same degree. I liked China, and I love Russia and its wonderfully poetic people. But I do not love their form of government, even now, when things, compared to the Stalin years, are like a summer vacation. 

As for the West, with corruption as bad as it is, if you think this is really bad, then you ain't seen nothing yet. And I hope you don't, but the trend concerns me.  This Hermitage Fund fraud sounds like the bank bailouts.  But that is not the worst.  I have seen what it can be like, especially during a time of intense financial and monetary turmoil.

"On the night of 16 November 2009, Sergei’s condition became critical. Only then did they move him to a prison with an emergency room. However, when he arrived, he wasn’t treated, but was put into an isolation cell and chained to a bed.

Eight riot guards with rubber batons then entered the cell and beat him until he was dead. He was 37 years old."

Bill Browder, Turning the Tables on Russia's Elite: The Story Behind 'The Magnitsky Act'

The Magnitsky Act is currently being considered by the US House of Representatives. Here is a recent story on it by The Washington Post: The Kremlin's Blacklist.

And in addition to passing laws and pointing out the faults in another, and deservedly so, I hope the Justice League of America can take a lesson from it. Because that brutal carelessness towards the weak, and the individual, the progressive reformer, and the unfortunate other is exactly where they are heading in their untempered extremism and unbridled greed.

Violent, careless talk desensitizes a people, and too often presages violent careless actions.

PFGBest Is MF Global All Over Again: Gambling and Living High With Customer Funds

And another failure of self-regulatory industry groups and the inept CFTC.

Once again I must turn to Lauren Lyster on RT for the in depth look into US financial fraud coverage.

The mainstream financial news networks in the States are an extended infomercial for Wall Street. And their coverage of economic news and issues might make even Rupert Murdoch blush.

And so many watch these official Wall Street channels with the volume turned low, for just the numbers and any headlines, and turn to alternative sources for the real news, judging from the ratings reports.

Increasingly surreal, as life imitates Orwell.

PBS Frontline: Money, Power, and Wall Street: Part Four

"Wall Street has lost its way. And it all began when the Banks started trading for their own profits, and not for their customers."

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.

Watch Money, Power and Wall Street: Part Four on PBS. See more from FRONTLINE.

Acemoglu and Robinson: Why Nations Fail

In a generally deferential and ineffective Congressional spectacle, some say minuet and I think kabuki dance, Jim DeMint's 'questioning' of Jamie Dimon, who responded to most serious questions with poker faced whoppers, today pushed me over the edge, and so putting the internet feed on mute, I thought I would take a moment to bring the study Why Nation's Fail by Acemoglu and Robinson to your attention.

"Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people,” write Acemoglu and Robinson. Extractive institutions, whether feudalism in medieval Europe or the use of schoolchildren to harvest cotton in contemporary Uzbekistan, transfer wealth from the masses to elites.

In contrast, inclusive institutions—based on property rights, the rule of law, equal provision of public services, and free economic choices—create incentives for citizens to gain skills, make capital investments, and pursue technological innovation, all of which increase productivity and generate wealth. Economic institutions are themselves the products of political processes, which depend on political institutions. These can also be extractive, if they enable an elite to maintain its dominance over society, or inclusive, if many groups have access to the political process. Poverty is not an accident: “Poor countries are poor because those who have power make choices that create poverty.” Therefore, Acemoglu and Robinson argue, it is ultimately politics that matters.

The logic of extractive and inclusive institutions explains why growth is not foreordained. Where a cohesive elite can use its political dominance to get rich at the expense of ordinary people, it has no need for markets and free enterprise, which can create political competitors. In addition, because control of the state can be highly lucrative, infighting among contenders for power produces instability and violence. This vicious circle keeps societies poor.

In more fortunate countries, pluralistic political institutions prevent any one group from monopolizing resources for itself, while free markets empower a large class of people with an interest in defending the current system against absolutism. This virtuous circle, which first took form in seventeenth-century England, is the secret to economic growth."

James Kwak, Failure Is An Option, A Review of Why Nations Fail

As you know I have often said that in a sovereign fiat currency, inflation and deflation are a policy decision.

Acemoglu and Robinson take this premise a broad step further, and show through many historical examples that national success or failure, as one might define it in terms of the broadest happiness and success for the most people, is also the result largely of policy decisions.

Neither austerity or stimulus will be effective in restoring growth to the American economy. Most if not all of the pain of austerity will fall on the hapless victims and the disenfranchised innocent, while most of the profits of recovery through stimulus will flow to the one percent. No matter what strategy you may employ, it is difficult to be successful against a stacked deck in a rigged game.

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.

Why Nations Fail

I would tend to add to what Robinson has to say that extractive economic institutions tend to actively promote and fund extractive political movements, laws, public policy, and systems of both the left and the right. Even the subversion of effective government and a descent into near anarchy can serve the monied interests, because effective democratic government is a counterbalance against private power.

At their extremes, neither communism nor fascism nor corporate capitalism are much different, as they both become extractive for the benefit of a small elite at the expense and misery of the people.

Taibbi: The Epic Failure of the SEC

"The big thieves hang the little ones."

I cannot argue with what Matt Taibbi says here, having quoted others like Bill Black about the same situation in great detail.

But in fairness to the SEC, this is hardly the case of a single regulator falling into porn-surfing indolence while they wait for another turn through the Wall Street revolving door.

The SEC is just another branch of regulatory incompetence and capture in good company with the CFTC and the FED, which gained even more regulatory powers in the recent 'reforms.' There are a few good regulators but they tend to be isolated and beleaguered.   The sad case of Brooksley Born was a good example of how bad regulatory policy drives out the good. 

This non-specific failure implies that there is much more than an SEC organizational or funding problem, and more likely systemic failure involving misplaced priorities and conflicts of interest that flow down from the Congress and the Administration among others. 

I would like to think that the people are getting a bit tired of handsomely paid and highly comped corporate and political 'leaders' who, when the time comes, don't know anything about anything that is surely within their direct responsibility. There are little to no downsides for failure if you are on the right side of the glass ceiling and a vetted member of the players club, a master of the universe.

And that moral hazard may be the most powerful attraction and incentive to bad behaviour of all. Power attracts the corruptible, without respect to race, gender, or creed.

Rolling Stone
SEC: Taking on Big Firms is 'Tempting,' But We Prefer Whaling on Little Guys
By Matt Taibbi

If you want to see a perfect example of how completely broken our regulatory system is, look no further than a speech that Daniel Gallagher, one of the S.E.C.’s commissioners, recently gave in Denver, Colorado.

It’s a speech whose full lunacy is hard to grasp without some background.

It’s by now been well-established that the S.E.C.’s performance in policing Wall Street before, after, and during the crash has been comically inept. It would be putting it generously to say that the top cop on the financial services beat has demonstrated particular incompetence with regard to investigations of high-profile targets at powerhouse banks and financial companies. A less generous interpretation would be that the agency is simply too afraid, too unwilling, or too corrupt to take on the really dangerous animals in this particular jungle. 

The S.E.C.’s failure to make even one case against a high-ranking executive involved in the mass frauds leading to the 2008 crash – compare this to the comparatively much smaller and less serious S&L crisis twenty years earlier, when the government made 1,100 criminal cases and sent 800 bank officials to jail – became so conspicuous that by the end of last year, the “No prosecutions of top figures” idea became an accepted meme in mainstream news media coverage of the economic crisis.

The S.E.C. in recent years has failed in almost every possible way a regulator can fail to police powerful criminals. Failure #1 was that it repeatedly fell down on the job even when alerted to problems at big companies well ahead of time by insiders. Six months before Lehman Brothers collapsed, setting off a chain reaction of losses that crippled the world economy, one of Lehman’s attorneys, Oliver Budde, contacted the S.E.C. to warn them that there were problems with the company’s accounting; the agency blew him off. There were similar brush-offs of insiders with compelling information in cases involving Moody’s, Chase, and both of the major Ponzi scheme scandals, i.e. the Bernie Madoff and Allen Stanford cases.

Read the rest here.

Barry Ritholtz Interview On the Financial Crisis from Capitalism Without Failure

Excellent interview as always by Barry, and an interesting list of suggested readings. His blog, The Big Picture, is among the best.

I would respectfully include ECONned by Yves Smith on the reading list. It adds a dimension of scholarship and detailed analysis found nowhere else.

Barry Ritholtz on the Crisis: Causes, Cures, Corptocracy, and Suggested Reading

When you get bit by a dog, you don’t just look at the dog, you have to look at the owner who is holding the leash.To me, a lot of the regulatory changes, and a lot of what the Federal Reserve did, stand on their own as a major factor. But if you’ve read David Hume, if you’ve studied the philosophy of causation, you have to look at what motivated those changes.

I have these debates with friends. One group blames everything on big government; the other group blames everything on big corporations. The sad news is that there’s really no difference between the two: Big government and big corporations work hand-in-hand. If you want to know who is the puppet and who is the puppet master, it sure looks like Wall Street has been pulling the strings of Congress for many, many, many years.

I remember the Dick Durbin quote, right in the middle of the crisis. He was astonished at all the bankers and bank lobbyists running around the halls of Congress, and said, “I can’t believe these guys – they act as if they own the place.” The fact is, it’s not an act – they do own the place...

Read the rest here.

No Justice: SEC Probes Lehman For Three Years, Recommends Nothing

Corruptio optimi pessima.
(The best things when corrupted become the worst.)

Aristotle, Nicomachean Ethics

Not even a wristslap.

Well at least the SEC released its report. The craven curs and hypocrites at the CFTC have been studying the criminal manipulation of the silver market for more than four years, and as of yet have not even had the decency to release their findings, and then proclaim they will do nothing about it.

It is the contempt of vultures. The more you take it, the bolder they become.

But not to worry, you will be able to vote for 'change' again in November.

There will be another financial crisis. And there will be another bailout. And you will take it and do nothing, except perhaps grumble quietly and draw comfort with the thought, 'Thank God, at least we are not socialist like Europe.' Before it is over they may do monstrous things in your name, and you will avert your eyes and say nothing.

"For what does it profit a man, if he shall gain the whole world, but lose his soul?"

There is little downside to white collar crime, and accounting fraud has been effectively decriminalized in the acceptance of Lehman's 'Repo 105.'

Nothing is safe.

Deep Capture the Movie.

Bloomberg
SEC Staff Said to End Lehman Probe Without Seeking Action
By Joshua Gallu
May 24, 2012

U.S. Securities and Exchange Commission investigators have concluded their probe of possible financial fraud at Lehman Brothers Holdings Inc. and determined that they will probably not recommend any enforcement action against the firm or its former executives, according to an excerpt of an internal agency memo.

The agency has been grappling with the case for more than three years amid questions from lawmakers and investors as to whether Lehman misrepresented its financial health before filing the biggest bankruptcy in U.S. history in September 2008.

Under a heading reading “Activity in Last Four Weeks,” the undated document reads, “The staff has concluded its investigation and determined that charges will likely not be recommended.”

SEC officials didn’t dispute the authenticity of the memo or its contents.

Pressure on the agency to punish any wrongdoing related to Lehman’s collapse escalated after Anton Valukas, the court- appointed bankruptcy examiner, found the firm misled investors with “accounting gimmicks” that disguised the firm’s leverage.

Senior officials have been reluctant to formally close the matter even though investigators found a lack of evidence of wrongdoing, according to people with direct knowledge of the matter. The officials have weighed issuing a public report on their findings that would stop short of an enforcement action while describing questionable conduct...

Read the rest here.

William Black on JP Morgan and the Failure to Regulate Wall Street Fraud

"It is no exaggeration to say that since the 1980s, much of the global financial sector has become criminalised, creating an industry culture that tolerates or even encourages systematic fraud. The behaviour that caused the mortgage bubble and financial crisis of 2008 was a natural outcome and continuation of this pattern, rather than some kind of economic accident...And yet none of this conduct has been punished in any significant way."

Charles Ferguson, Inside Job


"I know that my retirement will make no difference in its [my newspaper's] cardinal principles, that it will always fight for progress and reform, never tolerate injustice or corruption, always fight demagogues of all parties, never belong to any party, always oppose privileged classes and public plunderers, never lack sympathy with the poor, always remain devoted to the public welfare, never be satisfied with merely printing news, always be drastically independent, never be afraid to attack wrong, whether by predatory plutocracy or predatory poverty."

Joseph Pulitzer


"We are not left to conjecture how the moneyed power, thus organized and with such a weapon in its hands, would be likely to use it. The distress and alarm which pervaded and agitated the whole country when the Bank of the United States waged war upon the people in order to compel them to submit to its demands can not yet be forgotten.

The ruthless and unsparing temper with which whole cities and communities were oppressed, individuals impoverished and ruined, and a scene of cheerful prosperity suddenly changed into one of gloom and despondency ought to be indelibly impressed on the memory of the people of the United States. If such was its power in a time of peace, what would it not have been in a season of war, with an enemy at your doors?

No nation but the freemen of the United States could have come out victorious from such a contest; yet, if you had not conquered, the Government would have passed from the hands of the many to the hands of the few, and this organized money power from its secret conclave would have dictated the choice of your highest officers and compelled you to make peace or war, as best suited their own wishes. The forms of your Government might for a time have remained, but its living spirit would have departed from it."

Andrew Jackson

Here are two pieces by William K. Black on JPMorgan and the rampant and ongoing fraud and speculation on Wall Street. It tells the backstory of the subversion of the democratic process and how it is being rationalized by the corporate media.

A colleague and I were remarking the other day at the effectiveness of the Wall Street machine to spin the media, both at MF Global and JPM most recently. William K. Black strikes to the heart of it.

If you can do nothing else, if you do not have the means or the vocation for speaking out, you can at least offer some moral support and encouragement to those who do, and help to pass the message along to others.

JPMorgan's Addiction To Gambling on Derivatives
By William K. Black

JPMorgan’s flacks and apologists have, unintentionally, exposed the fact that their cover story – hedging gone bad – is false. JPMorgan runs the world’s largest gambling operation in financial derivatives. The New York Times reported the key facts, but not the analytics, in an article entitled “Discord at Key JPMorgan Unit is Faulted in Loss.” The analytics suggest that the latest JPMorgan cover story – it was JPMorgan’s “Achilles the heel” (based in the UK) who caused the loss – is misleading.

The thrust of the story is that in the beginning JPMorgan’s Chief Investment Office (CIO) was run by a fair princess (Ina Drew) and all was fabulous. Sadly, Ms. Drew contracted Lyme’s Disease and was unable to ensure peace and prosperity in her land. The evil Achilles Macris, based in the UK, became disloyal and mean. He made massive, bad purchases of financial derivatives that caused major losses. CIO senior officers based in the U.S. (and women to boot) tried to warn Achilles but he screamed at them and refused to listen and learn. The just king, Jamie Dimon, did not act promptly to save his kingdom from loss because of his great confidence in Princess Drew.

The personal story of Achilles acting like a heel makes compelling journalism, but it obscures rather than clarifies the analysis as to why JPMorgan poses a clear and present danger to the global economy.

We need to begin with context. It was toxic financial derivatives (not) backed by fraudulent liar’s loan mortgages (“green slime”) that drove the U.S. crisis. Paul Volcker urged the administration and Congress to bar any entity that received federal deposit insurance from investing in financial derivatives. The Dodd-Frank Act did so in a provision called “the Volcker rule.” Treasury Secretary Geithner and Federal Reserve Chairman Bernanke, who exist to serve the interests of CEOs of the largest banks, oppose the Volcker rule. Jamie Dimon leads the banking industry’s opposition to the Volcker rule.

Dimon has a three-part strategy: stall the Volcker rule, gut its effectiveness by creating a massive loophole, and get the rule repealed by a future Congress. The loophole takes advantage of the fact that the Volcker rule was not intended to prevent banks from using derivatives to create (true) hedges. The current draft of the rule, however, renders the rule useless because it allows banks to call non-hedges “hedges” – it adopts a standard I call “hedginess.” A systemically dangerous institution (SDI) like JPMorgan has vast amounts of financial derivatives and it can (and does) call any speculative bet it takes in financial derivatives a “hedge.”

The NYT article demonstrates that JPMorgan is speculating, not hedging, and that the current draft of the Volcker rule would render us defenseless against the next financial crisis. The article misses these analytics and presents a misleading portrayal of the purportedly good years of CIO under Princess Drew. It turns out that CIO’s profits and losses come from the same practice – gambling on massive amounts of financial derivatives – not hedging. The NYT misses this key analytical point...

Read the rest here at The Big Picture.

Additionally below is an interview that William K. Black has done with Lauren Lyster at Russia Today.

As always, one does not find this type of insightful discussion at the mainstream media which tends to present fake arguments and discussion between paid consultants and flacks from the major parties, both of whom are obtaining record amounts of money from corporations. The latest estimates are that Obama and Romney will gather in $1.5 Billion in campaign 'donations' for this November.

The Big Question: Are Funds At US Financial Firms Safe?

The short answer is 'maybe.' It is more of a buyer beware situation than most had thought, and still think.

It is nice to see someone in the mainstream media addressing this situation intelligently and without making an apology for what is apparently a criminal act and surely an egregious abuse of the public trust.

It is an axiom that it is not the initial crime that does the greatest and most widespread damage, although in this case it appears likely that someone in MF Global is due for jail time.

The damage is going to be to the US and British financial systems, Wall Street and the City of London, and in a large part because of the capture of political process by the monied interests.

This week the Senate led by Richard Shelby turned down the appointment of Richard Cordray to head the Consumer Financial Protection Bureau.  They have vowed to block any appointee until they can change the law that authorized the Bureau in the wake of the financial crisis in order to provide 'accountability.'  For them that means the ability to control the Bureau and starve it of funds in order to protect their banking cronies on Wall Street.  

Nothing is ever perfectly safe in this world. But some things are safer than others and there are steps one can take to diversify their wealth and avoid higher risks.

'A wise person does at once, what a fool does at last. Both do the same thing; only at different times.' 

Lord Acton

If I am correct, there are even bigger scandals to come when the tide goes out again, although there will be great efforts made to cover them up and excuse them 'for the sake of public confidence in the system.'    The derivatives market is a scandal-in-process, and is likely to rock the US banking system and the Dollar to their foundations when it topples. 

There may be even larger losses and anxiety for the unsuspecting who have misplaced their trust in false ideologies, slogans and theories promoted by a self-serving oligarchy.

NYT
A Risk Once Unthinkable
By James B. Stewart
December 9, 2011

Are customer accounts at brokerage firms safe?

Until the collapse of MF Global, that’s a question I thought I’d never have to ask.

Brokerage firms are required by law to maintain segregated accounts holding all client assets, including stocks, bonds, mutual funds, money market funds and cash. The law was passed after the 1929 crash, in the depths of the Depression, to make sure that customer assets were there at all times, ready to be disbursed even if everyone asked for their money at once...

I had always assumed it was impossible and that strict internal controls existed at all brokerage firms so that firm officials couldn’t tap segregated customer funds even if they were willing to break the law.  Thanks to MF Global, it’s now apparent that isn’t necessarily true. “If people are determined to misuse customer funds, they will misuse them,” said Ananda Radhakrishnan, the director of the division of clearing and risk at the Commodities Futures Trading Commission.

That’s because the commodities and securities industry is mostly self-regulating, and self-regulation ultimately depends on the integrity of the regulated. Broker-dealers — securities firms that execute trades of stocks, bonds and other assets for customers — are overseen by the S.E.C., while futures commission merchants, which trade commodities, derivatives and futures, are regulated by the C.F.T.C. Like most large brokerage firms, MF Global was both a broker-dealer and a futures commission merchant, though its primary business was commodities futures trading...

Typically, this requires transfers from segregated accounts (other than at the customer’s request) to be approved by multiple officials, including in many cases, the firm’s chief financial officer and chief compliance officer.

“It’s not a low-level functionary,” a regulator said. “It’s someone who has real standing. Most customer assets are held at the biggest firms and they have scores of people involved in this process....”

The law also allows commodities firms like MF Global to use segregated customer funds as a source of low-cost financing for their own operations, but they are required to replace any customer assets taken from segregated accounts with supposedly ultrasafe collateral of the same value, typically United States Treasuries, municipal obligations and obligations whose payments of principal and interest are guaranteed by the government.

This week, the C.F.T.C. issued new rules restricting how client assets can be invested, which had grown under C.F.T.C. interpretations to include sovereign debt and transactions known as “in-house repos,” or repurchase agreements, in which a firm contracts with itself to use customer assets as, in effect, interest-free loans to finance its inventory of Treasury bonds. MF Global was apparently a heavy user of in-house repos, and before his firm collapsed, Mr. Corzine had argued strenuously against the C.F.T.C.’s proposal to ban them.

Making bad bets on European sovereign debt — like making bad bets on United States mortgage-backed securities — isn’t a crime, but improperly transferring segregated customer assets is a potential criminal violation of the securities laws and a relatively straightforward one at that. (The United States attorney’s office in Manhattan is in the early stages of investigating the removal of customer assets from MF Global.)

I spoke this week to several people involved in the MF Global investigation. No one has reached any firm conclusions about how the assets were transferred, but possible innocent explanations have dwindled to almost none. And James B. Kobak Jr., a lawyer for the MF Global trustee, said in court on Friday that there were “suspicious” trades made from customer accounts. If that’s the case, there may have been a deliberate and concerted effort to override MF Global’s internal controls to gain access to segregated customer assets, and if that can be proved, those responsible should be prosecuted and, if convicted, go to jail.

Unfortunately for MF Global’s customers — and future victims of similar crimes, if that’s what it turns out to be — there’s no easy remedy and it will most likely be months or even years before they recover their money. The Securities and Investor Protection Corporation explicitly warns that it’s “not uncommon for delays to take place when the troubled brokerage firm or its principals were involved in fraud.”

SIPC will replace up to $500,000 of securities and cash (but not futures contracts) missing from customer accounts at member firms. A measure of the magnitude of the problem is that since its creation in 1970, SIPC has advanced $1.6 billion to make possible the recovery of $109.3 billion in assets for an estimated 739,000 investors (through the end of 2010).

Meanwhile, the C.F.T.C.’s enforcement capabilities, like the S.E.C.’s, have been starved for lack of funding...

Read the entire article here.

CFTC Commissioner O'Malia Warns of 'Rash Reforms' - "Isolated Incident" - Opposes Position Limits

The CFTC must make haste to prove to the public that MF Global was an isolated incident. It should not become involved in the issues of returning customer funds.

Oh, such wiles are hidden in the voice of reason and 'free market' ideology. Let's not be hasty. After all, it is only customer money, and we are just the regulators responsible for making sure it didn't happen in the first place.

Commissioner O'Malia has also actively opposed 'position limits' on silver and other reforms in commodity trading designed to curtail manipulation.

"O'Malia said the agency had overreached its mandate and echoed the industry's argument that there was no "empirical evidence" to substantiate the rule."

In his opening statement on position limits he said:

"...in addition to failing to detail costs, the two final rulemakings fail to articulate a convincing rationale for eliminating our current regime of principles-based regulation and substituting in its stead a prescriptive “government-knows-best” regime."

Principles based regulation. Unfortunately the principles are being written and administered by the brokerage firm of Dewey, Cheatum and Howe & Assoc.

Let's make haste to show this is an 'isolated incident.' How about making some haste to get the customers' money back, and telling us who took the money and what they are charged with?

How can this possibly be an 'isolated incident?' There's a fine line between an isolated incident and just another episode in a multi-year financial gang bang of the American public by Wall Street's monied interests.

Commissioner O'Malia was appointed by Barack Obama in 2009 according to Huffington Post: Scott O'Malia: Obama Appoints Ex-Lobbyist For Enron-Like Company To Top Regulator Position

Obama's failure to fulfill his electoral mandate, for whatever reasons, is one of the greatest flops since Plan 9 From Outer Space.

Credibility trap. Regulatory capture. Corporate "News." Judas goat reformers.

I fear the truth, and financial reform, will be led down a blind alley, and strangled. The best I can hope for is that the customers' money will be returned out of shame and fear, if not justice and wisdom.

CFTC Chairman Gensler is apparently asking for a December 5 vote to restrict the manner in which brokerages can use customer funds. Hence Commissioner O'Malia's warning on making changes to the status quo, and the new threat from the Congress to pass deep cuts in CFTC funding.

And next year the American public will be given Morton's fork opportunity to choose between two flavors of corporate extrusion, Tweedleflip and Tweedleflop. And so they will hold their noses, and most likely cast their joyless votes.

CFTC official warns about rash reforms post-MF Global
By Christopher Doering
Wed Nov 16, 2011 10:46am EST

WASHINGTON, Nov 16 (Reuters) - A U.S. futures regulator on Wednesday pushed for immediate action in the wake of collapsed brokerage MF Global, including a requirement that all intermediaries should hire an independent party to make sure customers funds are kept separate from the firm's own money.

Scott O'Malia, a Republican commissioner at the U.S. Commodity Futures Trading Commission, said in order to show the public that segregation works and that MF Global was an isolated incident, it must act quickly.

However, he warned about going too far with reforms without full knowledge of what happened at the failed brokerage.

"Many have said that the failure of MF Global was not systemic and that we are lucky. I don't view it in the same light," O' Malia said in a statement laying out the "next
steps" in dealing with the mess MF Global left behind.

MF Global filed for bankruptcy on Oct. 31 after investors and counterparties balked at revelations about the firm's bets on risky European sovereign debt.

Roughly $600 million is missing in customer accounts of the company's brokerage, and the CFTC is among the authorities investigating whether MF Global may have improperly mixed that money with its own funds.

O'Malia said the CFTC must ensure that all intermediaries are in compliance with segregation requirements. The agency also must reconsider rules it is crafting to implement the Dodd-Frank financial reform law.

In the three-page statement, O'Malia said it's too early to hail a proposal that would limit investments of segregated customer funds "as the solution to the MF Global problem."

He also warned against a plan that would have the CFTC intervene in insolvency proceedings to facilitate transfer of customer positions and collateral in the face of a shortfall.  "The Commission has not actively intervened in such a manner in MF Global, and so it is questionable whether the Commission would so intervene in the future," O'Malia said.

In light of MF Global's demise, O'Malia said the CFTC should ensure that clearing organizations are able to diversify their membership without introducing risk.

It's Official: Wall Street Firms May Legally Steal From Their Customers - Rationalizations to Follow

...and they may not have to pay them back, even when they are caught. The customers will be expected to 'take one for the team,' and for the good of the system. Confidence and all that.

“This means they can take segregated funds and leverage them to kingdom come. It means nothing is safe.”

Andy Abraham

If you have a commodity account with Wall Street, they may gamble with your money, with your assets, the rule on segregated accounts be damned. If they lose the money you might be reimbursed, or not. The losses may have to be 'socialized' and haircuts received.

This is most likely a distortion of the principle known as 'rehypothecation' in which a broker can use customer positions and holdings as collateral pledged for a margin loan for the purpose of securing funding from a third party to service that loan.

The principle at play here may be closer to a type of droit du seigneur, in which any assets you have posted at a futures brokerage may be used at will by the broker for their own purposes without regard to any customer obligations. It depends on the extent to which MF took customer assets and leveraged them.

In a way it is just making the unbalanced relationship between Wall Street and its customers official.

It means that customers are bearing hidden counterparty risks on assets to which they thought they had a clear title, such as Treasuries, and foreign currencies, and warehouse receipts for precious metals.  

It means that brokers can go beyond the mere provision of funding for loss, and use customer accounts to fund their own leveraged speculation under exemptions duly granted by their 'regulators.' 

This sort of systemic abuse is typically exposed when there is a market dislocation. It is what finally exposed Madoff, for example, despite the many years that the regulators were turning a blind eye to his scheme.

This sort of arbitrary distribution of gains and losses occurs more frequently than you might imagine on Wall Street, at least from what I have seen and heard, and not just with commodity brokers. I have even heard of specially privileged customers who can make $100,000 in a few trading days without even having any knowledge of the markets in which they have 'traded.'

I stopped trading on the futures exchanges a few years ago when I experienced enough one-sided 'rule changes' to persuade myself at least that it was becoming an insiders' game with slim odds of success for the 'outsider.' Or perhaps I was just becoming aware of it had already become, or had always been.

Unfortunately it is hard to escape inefficiency in markets, because despite all that has happened, these fellows still set the prices for much of the world's food, energy, and basic materials, at least on the official exchanges.

The CFTC has been disgracefully negligent, and given to cronyism, but in the spirit of modern American management practice it may just hide behind a claim of incompetence. They granted some exemptions to influential insiders, and the markets proved that the exceptions were loopholes for fraudulent abuse of the public trust.

The Justice Department is investigating the case of MF Global for any violation of the laws. I suggest they pay special attention to the laws regarding 'fraudulent conveyance' in the posting of the customer assets as collateral with MF's creditors, even as the firm was paying its employees bonuses, knowing that it was insolvent.

Actual fraud typically involves a debtor who as part of an asset protection scheme donates his assets, usually to an "insider", and leaves himself nothing to pay his creditors. Constructive fraud does not relate to fraudulent intent, but rather to the underlying economics of the transaction, if it took place for less than reasonably equivalent value at a time when the debtor was in a distressed financial condition.

For example, where the debtor has simply been more generous than they should have or, in business transactions, the business should have ceased trading earlier to avoid giving certain business creditors an unfair preference (see generally, wrongful trading).

Obama should bring meaningful reforms to the regulatory agencies and the financial markets after the shocking abuses of the past twenty years. But I doubt he will bite the hand that feeds him. He will likely hide behind committees and a building of 'consensus' with the unabashed servants of the monied interests. It's in the nature of a credibility trap that reform will not come until the system finally seizes, and crashes, and there is an opportunity to hide their crimes in the rubble.

Forbes
MF Global May Have Used Customer Funds In The Losing $6.3 Billion Trade Without Informing Clients
By Robert Lenzner

After an intense day of investigation, I have just discovered that a CFTC rule (1.29) allowed Jon Corzine’s MF Global to use the margin and cash in customers heretofore segregated accounts to amass a risky $6.3 billion investment in European sovereign debt that backfired. Nor did Corzine have the obligation to inform any of these customers he was gambling with their money. Or that he was intending to keep all the profits for himself and his troubled firm. Nothing for the customers.

The language of Rule 1.29 allows “The investment of customer funds in instruments described in 1.29 shall not prevent the futures commission merchant (MF Global) or clearing organization so investing such funds and retaining as its own any increment or interest resulting therefrom.” Increment refers to any trading profits or gains.

The criminal division of the Justice Department in New York — as well as the SEC and the CFTC and members of Congress– are investigating whether any laws were violated and if so, whether any criminal charges can be brought. As of 3 pm today, there has been no sign of the missing $633 million. My sources believe it was probably grabbed by the institutions that made the margin calls on MF Global as the European bonds sank in value.

This shocking loophole, which is available to all commodity traders, whether giant ones like Goldman Sachs or members of commodity exchanges, means that huge risks are being taken with money that does not belong to the trading firms– without the customers having any idea of the danger they are in. As Andy Abraham, a futures trader in Israel put it to me today; “this means they can take segregated funds and leverage them to kingdom come. It means nothing is safe.”

This rule, which has been in effect since 1974, is shocking and highly irregular since it allows any futures dealer to use customers money for its own selfish purposes– and never inform its customers it is doing so. What’s even more unfair is that the dealer (MF Global) gets to keep all the income and the trading profits, if any from a transaction that uses other people’s money– not its own house capital. That is unless some prior arrangement about sharing profits was made privately beforehand with the client. None of the MF Global clients I’ve spoken to today had the foggiest notion about this arrangement– which at minimum is outrageously unfair to the rule that the customer comes first. All losses must be made up by the dealer, which in this case may be totally impossible..."

Read the rest here.


I wonder if they will even disclose the name of the firm that took the $600+ million in customer assets as collateral.

That will speak volumes in itself.

Here is some additional information from Lenzner at Forbes: Some MF Global Customers Want Corzine "Led Away In Cuffs"

My most well-informed source, who won’t identify himself tells me my original story was “partially correct in the usage of customer funds.” IE MF Global was allowed under Rule 1.29 of the CFTC, to use segregated customers accounts to invest in “high quality, liquid investments.”

He insists that , “The segregated funds rule prevents the firm from answering margin calls with Seg (segregated) funds for house bets. Lots of people in other trading firms are taking bets on when Corzine will be led away in cuffs.”My source also insists that Corzine was NOT allowed to use these funds for directional bets- and that “customer funds can only generate interest for MFG while they are held separately from house money.”

Lots of excuses will be made for what happened. The status quo has a huge vested interest in covering this up, for their personal benefit and 'the sake of the system.'

For example, the analogy in the above piece by Lenzner about customer banks deposits, and the actions of banks in lending them out to other people. Yes, and you are paid interest for that usage, and you know that they are doing it, and you know that their loan operations and deposits are (at least theoretically) regulated and insured by the government.

But overall Lenzner is one of the best financial reporters, and he shows remarkable journalistic integrity. Most mainstream reporters won't even touch this one because they are afraid to say something that might involve the sacrosanct monied interests and TBTF.
Wall Street has a wonderful way of rationalizing their slimier behaviour. After all, when the tech bubble of fraudulent representations crashed, the financial news anchor said that 'no one had MADE people buy those stocks.' Its not Wall Street's fault that people are uninformed and gullible, right?

"There will always be apologists for the powerful and politically connected who commit crimes."

Eliot Spitzer

My expectations for reform are remarkably low. I just hope that the customers get their money back, and more people become aware of what is going on. If anything is done about this except to make excuses for it, I will be pleasantly surprised to say the least. When Simon Johnson said that the US had suffered a "financial coup d'etat" he was not waxing poetic.

In the short term, I think the avoidance of the worst neighborhoods in the financial system is a likely reaction by investors. And those seem to be the forex, stock options, and futures markets, with a few of the slimier ETFs that are designed to lose as well. Such de facto boycotts have happened before and will happen again. What else can one do?

Wall Street is trying to organize a boycott of Mario Batali for remarks he made about #OWS and Wall Street.  I think they are showing what they fear the most - a boycott by their own retail customers.

A credibility trap is not a pretty thing. It smothers goodness and justice with a dark cloak of complicity.  This will not be resolved quickly or easily.

MF Global's Customer Assets - STOLEN - And Nothing You Hold In This System Is Safe

As suspected, MF Global brazenly took liquid assets like Treasuries and warehouse receipts, but not cash which would have been more quickly missed, from customer accounts to post as illegal collateral for emergency funding with a lender who must have known that they were receiving stolen goods.

When things fell apart, the lender simply took the collateral and liquidated it, and kept the money.

And now they are refusing to even acknowledge this transaction, and apparently the management of MF Global is not yet talking. Why? Because it was an insider deal, and they don't want to give back the stolen money.

When 'non-consequential' customers were requesting their funds, they were issued checks instead of wire transfers. The checks of course were not honored and bounced. But days later, and just hours before the bankruptcy filing, MF Global was paying BONUSES to its UK traders. Remarkable in light of how much dirty business the NY firms have been outsourcing to London. Follow the hush money.

This is a scandal of the first order, and a severe test for the Obama Justice Department, the regulatory agencies, and the exchanges.  This is a great crime, undeniably premeditated, and possibly the tip of an iceberg that would shake the public confidence in a deeply corrupt financial system. 

If a registered broker can simply take Treasuries and receipts for physical assets like gold and silver from customer accounts and give them to a complicit crony lender, and then look at the public with a straight face and say the money is missing and they do not know where it is, then no one's accounts are safe, anywhere, at any bank or broker, in the US financial system. 

This has every appearance of a legally sanctioned theft, pure and simple.

Postscript:  Apparently it really is legally sanctioned according to CFTC Rule 1.29.  But it still may have been a violation of the laws of fraudulent conveyance.  Where is Eliot Spitzer when you need him?

Here is a synopsis of the likely events from Forbes:

When did MF Global exploit the customer segregated accounts and why? How were the proceeds used to stem the firm’s deepening insolvency?

Based on the sequence of events described above, I believe that MF Global transferred assets, not cash, from customer segregated accounts to a “house” account sometime late Wednesday or early Thursday.

I’ve given those who executed the “nuclear option” to save MF Global the benefit of the doubt. I believe those executives used all available legitimate means to raise cash first, including trying to sell proprietary assets, as CNBC reported, and exhausting existing credit lines. When margin calls on the repurchase agreements and account closure demands from strategically important clients – not the bread and butter individual traders and smaller investors and money managers who got rubber checks – kept coming, they hit the wall.

Why do I believe MF Global executives transferred customer assets not cash to “house” accounts? Because missing cash would be noticed immediately. Their clients were still trading and clearing and cash was required to settle. Securities such as U.S. Treasury Bills, blue-chip equities such as CME Group stock held by many exchange members, and physical assets such as gold, warehouse receipts, and other certificates of title are less active. They would not be missed Thursday through Monday...

Any firm willing to lend $300-400 million for a week or so against approximately $700 million of customer assets was certainly wise enough to require recourse to those assets in the event of a bankruptcy. Some of the assets, like CME stock, were sure to drop in value if the bankruptcy occurred.

When MF Global filed for bankruptcy midday on Monday October 31, 2011, the lender owned the customer assets.

My guess is the pledged assets were immediately liquidated.

No one is raising their hand to admit they’re the firm who lent MF Global several hundred million dollars, enough to get them through the weekend, based on collateral MF Global had no right to pledge. It’s not clear what the responsibility of a firm is in that situation to ask questions and confirm title. What is clear is that the arrangement, most likely a favor called in based on very strong relationships, must have been planned in advance. When all else failed to generate enough cash on Wednesday afternoon, someone at MF Global pressed the button and set the wheels in motion.

The lender must have had the capacity to make such a loan and the ability to execute a strategy intended to leave few traces. But there are always trails to follow. (Like the traces of the enormous number of put options that were placed prior to 911.)

Regulators can look for records at MF Global and at the DTC of transfers of assets between customer accounts and MF Global house accounts and, then, of those same assets between MF Global and a third party. I suspect there is only one lender, since there was not enough time to arrange for more than one and the potential for exposure would be greater with more counterparties.

I don’t think the last inning lender is one of the banks with existing MF Global accounts. Everyone knew those organizations would be under immediate and heavy scrutiny...."

Read the rest here.

I beg to differ with the author. I do think it is a big, very well-connected name, and I think they are a party to a greater ongoing fraud that will never see the light of day, even if the money is eventually returned. And I have to wonder if anyone of consequence will ever be prosecuted for this, because they simply know too much about this and other things.

This increasingly brazen theft is the consequence of moral hazard from a credibility trap.

I am amazed at how so many people cannot wrap their minds around what is happening in the financial system, as a late stage fraud turns increasingly to blatant looting.

Is this a classic case of cognitive dissonance? No one really wants to hear about it. They look at other things, trivialities. They simply will not see it, until it comes for them. What is it going to take, how far can this go?

If this continues, then nothing you hold in this system is safe.

Regulators Searching MF Global for Millions in Missing Customer Funds

Do you know where your account funds or assets owned through ETFs really are?  Do the regulators and overseers of the markets?  Do they care, or just look the other way?

NYT Dealbook
Regulators Investigating MF Global
By BEN PROTESS, MICHAEL J. DE LA MERCED and SUSANNE CRAIG

Federal regulators have discovered that hundreds of millions of dollars in customer money have gone missing from MF Global in recent days, prompting an investigation into the company’s operations as it filed for bankruptcy on Monday, according to several people briefed on the matter.

The revelation of the missing money scuttled an 11th hour deal for MF Global to sell a major part of itself to a rival brokerage firm. MF Global, the powerhouse commodities brokerage run by Jon S. Corzine, had staked its survival on completing the deal.

Now, the investigation threatens to tarnish the reputation of Mr. Corzine, the former New Jersey Governor and Goldman Sachs chief who oversaw MF Global’s demise, making it the first American victim of Europe’s debt crisis.

What began as nearly $1 billion missing had dropped to less than $700 million by late Monday. It is unclear where the money went, and some money is expected to trickle in over the coming days as the firm sorts through the bankruptcy process, the people said....

Read the rest of the story here.

Kleptocracy, "rule by thieves" is a form of political and government corruption where the government exists to increase the personal wealth and political power of its officials and the ruling class at the expense of the wider population, often without pretense of honest service.

No outside oversight is possible, due to the ability of the kleptocrats to personally control both the supply of public funds and the means of determining their disbursal.

Not Prosecuting Corporate Crime Aggressively Has Been US Government Policy Since 2008

In case you were wondering what the Congress and the Administration were doing with all those faxes, cards, phone calls, and letters you were sending in about the need for financial reform and tougher law enforcement, they decided to make it official policy not to aggressively prosecute the laws against white collar crime in 2008. Another innovation in outsourcing justice through extended self-regulation.

Apparently they told this privately to the Wall Street banks and their lawyers in 2008, but neglected to copy the American public on the memo.

Some have noticed the lack of reform, but the monied interests have done quite a successful PR job in refocusing the national discussion on priorities involving social issues, and the reform of the support systems for the weak, the unfortunate, and the elderly. Turning one group against another, and objectifying your intended victims through slogans and stereotypes, has always been an effective method of bending the herd to your will. Score one for Edward Bernays.

As W.C. Fields said, 'Never give a sucker an even break.'

How about it, feeling more confident yet? We know some people who are.

At least they have not overtly played the disability or the race card - yet. But things are relatively calm, and why be glum, the night is still young.

New York Times
Behind the Gentler Approach to Banks by U.S.
By GRETCHEN MORGENSON and LOUISE STORY
July 7, 2011

As the financial storm brewed in the summer of 2008 and institutions feared for their survival, a bit of good news bubbled through large banks and the law firms that defend them.

Federal prosecutors officially adopted new guidelines about charging corporations with crimes — a softer approach that, longtime white-collar lawyers and former federal prosecutors say, helps explain the dearth of criminal cases despite a raft of inquiries into the financial crisis.

Though little noticed outside legal circles, the guidelines were welcomed by firms representing banks. The Justice Department’s directive, involving a process known as deferred prosecutions, signaled “an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors,” Sullivan & Cromwell, a prominent Wall Street law firm, told clients in a memo that September.

The guidelines left open a possibility other than guilty or not guilty, giving leniency often if companies investigated and reported their own wrongdoing. In return, the government could enter into agreements to delay or cancel the prosecution if the companies promised to change their behavior.

But this approach, critics maintain, runs the risk of letting companies off too easily.

“If you do not punish crimes, there’s really no reason they won’t happen again,” said Mary Ramirez, a professor at Washburn University School of Law and a former assistant United States attorney. “I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space."

While “deferred prosecution agreements” were used before the financial crisis, the Justice Department made them an official alternative in 2008, according to the Sullivan & Cromwell note.

It is among a number of signs, white-collar crime experts say, that the government seems to be taking a gentler approach.

The Securities and Exchange Commission also added deferred prosecution as a tool last year and has embraced another alternative to litigation — reports that chronicle wrongdoing at institutions like Moody’s Investors Service, often without punishing anyone. The financial crisis cases brought by the S.E.C. — like a recent settlement with JPMorgan Chase for selling a mortgage security that soured — have rarely named executives as defendants..."

Read the rest of the story here.

Modern Monetary Baloney, Fundamental Values, and the Unaddressed Requirement for Reform

I agree with David Lindorff in his excellent piece, An Oh Please Moment, that the timing of the SP downgrade of US debt is highly questionable.

"Either S&P has been pressured by powerful Republicans and/or Wall Street Bankers to issue this warning, in order to add to national hysteria about the national debt and win more drastic cuts in social programs, or S&P is simply blowing it again."

Since the Ratings Agencies quite obviously have been in the pocket of the Wall Street monied interests for some time now, generating ratings on command for pay, there is much less question in my mind about which of the two alternatives are correct.

The bankers, having obtained huge sums of personal wealth by buying the government and looting the Treasury, are engaged in an aggressive campaign to make sure they can keep their ill gotten gains, without indictment, and pigs that they are, without any of the pain to be obtained from gaming the US financial system in a massive fraud and causing its collapse. They seek to direct that pain quite squarely and unashamedly on the lower and middle classes, while increasing their wealth by promoting even greater tax benefits and indirect subsidies from the public.  When one does not prosecute crimes, it emboldens the perpetrators to ever greater excesses.

 But I find myself, as always it seems, in the middle again, not being quite comfortable with some of the counter-arguments being made about the SP downgrade and its dodgy motivations.

"As Galbraith explains it, “US debt consists of bonds issued in US dollars, which I assume the S&P analysts know. How can the US possibly default on its own currency? The obligation is in nominal dollars, which is to say when the bond retires, the US issues a check in dollars to cover it.”

Since the US prints its own currency (or actually just issues electronic payments to create new money) whenever it needs it, as Galbraith puts it, “As long as there is diesel fuel to power up the back-up generators that run the government’s computers, they will have the money to back their own bonds.”

This is technically correct, and underpins much of what is described of late as modern monetary theory.

Since the interest and bonds are denominated in dollars, the US has the ability to print dollars at will without an effective external constraint since it 'owns' its currency.  The US is not answerable to some external standard like gold, or even a foreign central monetary authority with its own set of rules per se as in the case of Greece and the ECB.  On paper at least the US is answerable to the Fed, which in theory is an independent constraint on limitless spending emulating a gold standard, in the words of that monetary whoremaster Greenspan.

And so the particular prognosis of SP not only smells of rank politics, pandering to the money class, but it is also patently absurd in what it says.  The US is not risk of default.  But it is at risk of a de facto default. 

David Lindoff goes on to say quite insightfully:

"The problem will come when the dollar starts to seriously erode against other currencies because too much of the currency has been put into circulation. When that happens, there may be a shift away from the dollar as the world’s “reserve currency.” Looking further, one could then imagine the US being unable to issue debt to foreign investors, because they would no longer want to be left holding dollars, and the US would have to either drastically reduce its debt, or borrow in foreign-denominated debt--say Yen or Euros or Renminbi."

As I have said many times before, the limiting factor on the Fed's ability to create money is the value at exchange of its bonds, and the dollar which is merely a note of zero coupon and duration. 

The debt will be discharged, whether through payment or default.  And monetary inflation is most often the soft default method of choice.  The debt will be discharged.  The crux of the matter is how the discomfort if not outright pain will be allocated.  So far it is all carrot and few sticks to the creditors.

Mark Thoma captured the essence of the entire situation brilliantly and in a few words, quite nicely here:

"I am not as worried about the ability of the political process to deal with our long-run debt problem as S.&P. appears to be. One way or the other, the process will resolve this, especially since the public is demanding action.   (I have to admit I am not quite so confident that they will not just kick the can down the road even further given the opportunity. Political campaign reform is needed, and badly, and the Fourth Estate is in occupied territory. - Jess)

Don't let the downgrade allow those with wealth and power to push through the wrong solution. I am more worried about who will be asked to pay the costs of reducing the long-run debt to a more manageable level. Will we balance the books on the backs of those least able to pay and least able to defend themselves in the political process -- the sick, the poor, the elderly and children? Or will we ask those higher up on the income and wealth ladders to pay a significant part of the bill?"

What concerns me is that the focus of the discussion seems to be solely on allocating the pain, with the monied interest pressing their advantage, but few are talking anymore about the need to reform the system as the sine qua non.  

We can pour stimulus and subsidy into this broken and distorted system until the cows come home and the US resembles postwar England. But on the other hand, we can engage in draconian austerity until we recreate Dickensian London, with scarecrows of children doing awful labor until they meet an early death, with heartbroken families living in the streets and debtors prisons, while the Scrooges of Wall Street glory in their superior intellectual and predestined moral fiber to have avoided such a fate, which they cleverly promoted themselves through their financially based criminal enterprises.

But it will not, ever, result in a sustainable economic recovery, and a stable society without significant government abuse of individual freedoms.

Most likely the result will be a protracted stagflation, similar to what Japan endured and continues to endure, but with inflation replacing deflation because the US is a net importer running a trade deficit.  There will be endless war because besides financial fraud that is the US' other major industry.  And behind it all will be a growing domestic unrest and official repression, provocation and reaction.

Reform is not being discussed because the status quo is already moving on, and the few real reformers have been artfully co-opted by the ultra-rich, with the result as Matt Taibbi, himself a star in the truth-telling firmament, so colloquially puts it here:

"My own personal view on this is not so much that Tea Partiers are racists, but more that they're tremendous pussies. They have no problem puffing out their chests and screaming bloody murder about Mexicans or single black Moms taking their tax money for emergency room care or school lunches. But when John and Christy Mack rob them to buy mansions on the Upper East side, you suddenly can't find a Tea Partier within a thousand miles -- can't find one with the Hubble space telescope. For all their bluster and aggressiveness, billionaires make them go weak in the knees."

I personally don't think they are cowards at all, having shown the guts to face a hard life and carve a living out of it.  Rather, and I have cited this phenomenon several times in the past, it is the vulnerability of the dark side of human nature to temptation, and being badly used. When the going gets tough, it is a natural reaction among many to kick the guy below you in the face, and try and knock him off the ladder before he can knock you off, and curry favor with those above in the hopes that they will accept you.  

That is why there are things like religion and education and societal values which try to help people outgrow their schoolyard mentalities, and baser impulses to cheat and steal and lie,  and to mature as human beings.  Or at the very least, why there are laws and regulations to restrain those who for one reason or another are broken people but still functional enough to do others harm.  Anyone who believes in the natural goodness of people in crowds lives in a world of theory and delusion, and at the very least must have never driven on a modern freeway in rush hour.

I also think there is quite a bit of prejudice and unfairness directed at the Tea Partiers by the bi-coastal elite, who are not all that different from them except in taste and fashion, not so much as they might like to imagine anyway.  People are indeed sinful creatures, and one can find something wrong with anything that is wrought by them.  But there is a redeemable wonder in most people as well, if one will only seek for it, cultivate it, and not try and push them down and use them badly, and enslave them.

And perhaps the real cowards are those of the privileged and the educated class who had taken the oaths and accepted the stewardship, noblesse oblige, and were in the best position to actually speak out when the Fed and the government started creating serial asset bubbles, and allowing rampant fraud, and egregious government lies that took the country to unfunded wars, and maintained their silence either out of complicity or fear or a reflexive desire to defend the status quo which had kept them and sustained them, rewarded them.  Greenspan was able to engage in monetary and regulatory abuses for a long time because the thought leaders and power brokers were beneficiaries of his actions and fearful of his increasingly powerful bureaucracy, almost in the manner of a latter day Herbert Hoover.

Where are these people now, except for a few brave and notable souls deserving of encouragement and support, with regard to the increasingly obvious and blatant manipulation of the markets and prices, the legal abuses of the foreclosure process, the excessive fees and dangers of the leviathan banking system, and the growing body of evidence to support it?  Who is asking for the CFTC and SEC to do their proper job?  The Tea Partiers are the class of the overlooked and the relatively powerless, who know something is wrong, but are not sure what to do about it.   The apathetic timidity of those who know better allows a vacuum to be filled by the new Huey Longs of the Right whom they descry.  Could the mainstream media be any more compliant or benign to corruption, when not performing the function of outright propaganda and cheerleading for it?

Although a fiat currency might give Americans the euphoric feeling of independent and limitless wealth on command, it just does not work that way. The US has been gifted a deep and resilient economy and culture, bought over many years by blood and sweat and sacrifice.

It will take a monumental effort to bring it down, but I think the crony capitalists and oligarchs are up for the job if the people allow it, through complicity and sheer mean-spirited foolishness, but most likely apathy.  The problem with this sort of large, complex system is that it collapses so slowly and in stages that the participants don't seem to notice it happening, until some weight reaches a critical point, and the bough breaks, and the heavy burdens of the past all come down in a rush that none can withstand, or probably even understand, until they are standing in ruins.

What's Going On In The Silver Market: Audio Interview with Harvey Organ

First a bit of housekeeping. There will be no chart updates tonight.

Here is an interview that may be a little overdone in some parts, and with the opening codenames, but is very interesting, containing an abundance of informative content nonetheless. This is an interview from December of 2010. I thought it would be interesting to reprise it now, because so many of the things which they say are unfolding even three months later. The gold/silver ratio has dropped to 41, and silver has rocketed higher in price. I missed it initially because of an illness in the family.

Harvey Organ is a wealth of knowledge and detail.  I am not sure what is happening obviously because of the opaque nature of the situation and the apparent dissembling and obfuscation regarding the facts, especially in a period in which fraud has been revealed to be rampant in a variety of financial transactions.  I mean, really. How can one be certain of anything when dealing with this brood of vipers running the financial system?

And yet trust and confidence is at the very heart of a well functioning free market system for the allocation of capital and the pricing of goods.  And so it seems that crony capitalism could write its own epitaph in its mindless pursuit of greed. It is this abject and otherwise inexplicable failure to reform the financial system and break up the Wall Street Banks that undermines the economic recovery. I can think of no more obvious reason than a credibility trap.

The shorts appear to be trapped, and are playing for time, in what seems to be an increasingly untenable situation. I mean, unless you are completely naive or a book-talking dolt, having one or two institutions short about 25% of the world supply does seem a bit much, especially with all the secrecy surrounding it, and the inability to demonstrate that this is due to legitimate hedging by producers, information which should be disclosed since it absolutely impacts the valuations of publicly traded companies.

And it's a serious issue for the powers that be, because the trapped fish are some very big fish indeed, and may be connected to other things in other markets, and much bigger fish, perhaps the biggest in their ponds.

Before that happens, and after a protracted period of trading antics in which Blythe is given some leeway to try to wiggle out of the problem, I think that they will be told to 'throw in the towel,' and let silver run to roughly 16:1, from the existing ratio of about 41:1, with whatever price they can tolerate for gold given their limitations, on the basis that this is the historical and natural balance.

Without admitting any wrongdoing of course. The Fed can print enough paper to cover their losses. I suspect this would be done in concert with some other crisis. So I would not be looking for JPM to 'crash' per se. Rather, I would look for the next bagman patsy for a stealth bailout of the banks such as the role that AIG played for the Street in the 2008 financial crisis.

This gives me rough targets of $2000 gold and $125 silver. If you prefer $400 silver, then you should be looking for gold around $4000. And I think gold will at least reach a ratio of 2:1 with the Dow Jones Industrial Average, and maybe 1:1, so take it from there.

But first they have to dampen any talk of placing silver in the SDR basket if it is given international reserve status in lieu of the dollar. And then they have to persuade the world to move on, and not take any inconvenient notice of this particular fraud, as it may lead to questions about all those other frauds and deceptions being played, well-intentioned as they think they may be, or at least as they represent them, as in the case of the Wall Street bank bailouts, the insider trading, naked short selling, fraudulent financial instruments, campaign payoffs, and revolving door sinecures.





Harvey Organ's Gold and Silver Report

"As for the gold-silver ratio? It currently stands at about 41. Deutsche Bank, in a not particularly daring forecast, says it should fall below 40 in 2011 and 2012. We’re nearly there.

They run through some history that hints that the ratio could drop even further. Among their tidbits:

* From the 12th to the 17th century, the ratio held at about 12.
* Isaac Newton set a ratio of 15.5 early in the 18th century.
* The earth’s crust: silver exceeds gold by a ratio of about 18.75.

Lastly, China and Hong Kong were the last places to abandon the silver standard, in 1935. The China word for bank: Silver House.

'Trading activity from China has increased considerably over the past several years; we believe that much of this is a function of increased investor demand within the country as inflation threats build.'

So, like any good bull story these days, China plays a role."

Deutsche Bank: Silver Will Keep Streaking

Additionally, here is something a little more controversial. I am not quite sure what I think about it yet. In this interview Harvey is discussing what he perceives to be the musical chairs nature of GLD and SLV, Part 1 and Part 2. They work well in what might be called 'normal market conditions.' I would not use the word fraud, as it appears that it could be more in the nature of undisclosed counter party risk. And of course, I have little to no background in securities law. It is my very lack of knowledge that made this discussion interesting.  I do think their comparison between PSLV and SLV is unfounded and incorrect, because one is a closed end fund and the other is an ETF. 

I have felt for some time that Brown's Bottom in gold, the sales of England's bullion near the bottom of the market, were stealth bailouts of a bullion bank or two caught short in deals such as those discussed in the above interview.

No matter, these markets do appear on the surface to resemble a house of cards.  And this is cause for me at least to view them with concern, especially with the rank failures of regulation which the financial crisis recently disclosed.