Robert Reich on Moral Hazard and Obama's Failure

Robert Reich is a top Democrat, former Secretary of Labor under Bill Clinton, and a member of the Obama transition team.

In his recent blog he excoriates the Obama financial team's actions. And in doing so he echoes the things that have been said here, which we will take as some measure of validation from an intelligent public figure and top representative of the party in power.

Surely Obama must see that his Administration is a failure, beginning with his failure to maintain the promise of change, and address the need to reform the financial system.

Do something, Barack. Get a backbone, and do something for the country, and let the special interests, and the cronies of your cronies, be damned.

Start telling it like it is. Make this historic moment memorable, and not a shame.


The Continuing Disaster of Wall Street, One Year Later
Robert Reich
September 13, 2009

As he attempted to do with health care reform last week, the President is trying to breathe new life into financial reform. He's using the anniversary of the death of Lehman Brothers and the near-death experience of the rest of the Street, culminating with a $600 billion taxpayer financed bailout, to summon the political will for change. Yet the prospects seem dubious. As with health care reform, he has stood on the sidelines for months and allowed vested interests to frame the debate. Nor has he come up with a sufficiently bold or coherent set of reforms likely to change the way the Street does business, even if enacted.

Let's be clear: The Street today is up to the same tricks it was playing before its near-death experience. Derivatives, derivatives of derivatives, fancy-dance trading schemes, high-risk bets. “Our model really never changed, we’ve said very consistently that our business model remained the same,” says Goldman Sach's chief financial officer.

The only difference now is that the Street's biggest banks know for sure they'll be bailed out by the federal government if their bets turn sour -- which means even bigger bets and bigger bucks.

Meanwhile, the banks' gigantic pile of non-performing loans is also growing bigger, as more and more jobless Americans can't pay their mortgages, credit card bills, and car loans. So forget any new lending to Main Street. Small businesses still can't get loans. Even credit-worthy borrowers are having a hard time getting new mortgages.

The mega-bailout of Wall Street accomplished little. The only big winners have been top bank executives and traders, whose pay packages are once again in the stratosphere. Banks have been so eager to lure and keep top deal makers and traders they've even revived the practice of offering ironclad, multimillion-dollar payments – guaranteed no matter how the employee performs. Goldman Sachs is on course to hand out bonuses that could rival its record pre-meltdown paydays. In the second quarter this year it posted its fattest quarterly profit in its 140-year history, and earmarked $11.4 billion to compensate its happy campers. Which translates into about $770,000 per Goldman employee on average, just about what they earned at height of boom. Of course, top executives and traders will pocket much more.

Every other big bank feels it has to match Goldman's pay packages if it wants to hold on to its "talent." Citigroup, still on life-support courtesy of $45 billion from American taxpayers, has told the White House it needs to pay its twenty-five top executives an average of $10 million each this year, and award its best trader $100 million.

A few banks like Goldman have officially repaid their TARP money but look more closely and you'll find that every one of them is still on the public dole. Goldman won't repay taxpayers the $13 billion it never would have collected from AIG had we not kept AIG alive. (In one of the most blatant conflicts of interest in all of American history, Goldman CEO Lloyd Blankfein attended the closed-door meeting last fall where then Treasury Secretary Hank Paulson, who was formerly Goldman's CEO, and Tim Geithner, then at the New York Fed, made the decision to bail out AIG.) Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation. Which means you and I are still indirectly funding Goldman's high-risk operations.

So will the President succeed on financial reform? I wish I could be optimistic. His milktoast list of proposed reforms is inadequate to the task, even if adopted. The Street's behavior since its bailout should be proof enough that halfway measures won't do. The basic function of commercial banking in our economic system -- linking savers to borrowers -- should never have been confused with the casino-like function of investment banking. Securitization, whereby loans are turned into securities traded around the world, has made lenders unaccountable for the risks they take on. The Glass-Steagall Act should be resurrected. Pension and 401 (k) plans, meanwhile, should never have been allowed to subject their beneficiaries to the risks that Wall Street gamblers routinely run. Put simply, the Street has been given too many opportunities to play too many games with other peoples' money.

But, like the health care industry, Wall Street has platoons of lobbyists and an almost unlimited war chest to protect its interests and prevent change. And with the Dow Jones Industrial Average trending upward again -- and the public's and the media's attention focused elsewhere, especially on health care -- it will be difficult to summon the same sense of urgency financial reform commanded six months ago.

Yet without substantial reform, the nation and the world will almost certainly be plunged into the same crisis or worse at some point in the not-too-distant future. Wall Street's major banks are already en route to their old, dangerous ways -- now made more dangerous by their sure knowledge that they are too big to fail.

"It has now become clear that this was no ordinary crash."

Here is an informative piece on the banking crisis in Iceland. The commentary was so well done that we are using it in lieu of our own commentary based on the article in the Daily Telegraph.

What we would like to point out is that in all banking collapses of this sort, fraud and duplicity are always at the heart of it, as larceny is in most great fortunes through history.

The Community Organizer-in-Chief is speaking to New York's Wall Street today, urging them to do the right thing for the country. He still sees himself as precipitating action in others, as a change agent, rather than organizing and leading the action at the forefront. Old habits die hard. He is not an outsider visiting this community. He leads the community. He's the man, now.

Actions speak louder than words. The words are that Wall Street is paying back the taxpayer money with a nice gain. No one seems to be talking about AIG, which is an enormous loss for the taxpayers at the moment well north of 170 billions, and the almost scandalous payments of 100 cents on the dollar that were made on dodgy contracts to the likes of Goldman Sachs that should have been put into default, or at best paid off at pennies on the dollar.

We still hear rumours of ugliness on the 'off balance sheet' portions of some of these big banks, even the ones held up as models of recovery.

So, when Obama chides the Wall Street wiseguys in stern terms to 'do the right thing,' one can forgive us if we hear, in echoes from the back of the room, "do this" and "get bent."

He may as well walk into the aftermath of a vicious bank robbery and say to the perps with cash still in hand, "Now you boys stop doing that this minute. This is the fifth time you have stolen money and endangered the lives of innocent people. You can keep the money, but you had better not do it again.

Sheriff Summers and Deputy Tim, who you know so well from drinking with them after hours at your clubs, will stop you if you do. And remember, Bennie the Bookie has his eye on you. By the way, Rahm says thanks for the gifts and remembrances, as always."

Action, Mr. Obama. Not words. One does not scold even white collar criminals into confessing, much less changing their ways, and warnings do not work when the perps feel that they most surely own you and the advisors around you, given the toothless gestures you are making towards reform.


The Daily Bell
Iceland: what ugly secrets are waiting to be exposed in the meltdown?
September 14, 2009

"Almost a year since the collapse of the Icelandic banks, the rotten nature of these financial corpses is slowly beginning to emerge. Iceland: what ugly secrets are waiting to be exposed in the meltdown? For months rumours of share-ramping, market manipulation, excessive loans to their owners and unusual transfers off-shore have been circling Kaupthing, Glitnir and Landsbanki, whose failure last October left 300,000 British customers unable to access their money. It has now become clear that this was no ordinary crash. Iceland's special investigation into "suspicions of criminal activity" at the three banks is likely to stretch from Reykjavik to London, Luxembourg and the British Virgin Islands. Eva Joly, the French-Norwegian MEP and fraud expert hired by Iceland and now working with the Serious Fraud Office, now believes it will be "the largest investigation in history of an economic and banking bank collapse". - Telegraph

One has to keep in mind that Iceland is a country of about 300,000 people. And yet the "suspicions of criminal activity" stemming from the collapse of one of the world's smallest central banks are likely to spread around the Western world. Here's some more from the article about such "suspicions" ...

When the banks were put into administration last October, experts believed that Iceland's banks had simply fallen prey to the global credit crisis. But Dr. Jon Danielsson, an Icelander who teaches economics at the London School of Economics, believes that while the timing of the crash was dictated by the global banking crisis, the scandal is unique among European financial institutions.

He believes the root of Iceland's problems that have now decimated its economy appear to have started when the government decided to privatize the banks in the early 1990s. "Iceland got its regulations from the EU, which was basically sound," he says. "But the government had no understanding of the dangers of banks or how to supervise them. They got into the hands of people who took risks to the highest possible degree."

Kaupthing fell into the clutches of the Gudmundsson brothers, Ágúst and Lydur, who made their fortunes building up the Bakkavor food manufacturing empire, which supplies hundreds of supermarkets in the UK. Their investment vehicle, Exista, owned 23% of the bank, counting Robert Tchenguiz, the London property entrepreneur as a board member.
Kaupthing's loan book, which was leaked on to the internet last week, shows that around one third, or €6bn (£5.1bn), of its €16bn corporate loan book was going to a small elite group of men connected to the bank's owners and management.

Several investigations into Kaupthing centre on share ramping, where the bank would allegedly give loans with no interest or security in order to buy shares in that same bank - boosting the share price.

Yes, much to be concerned about. But is Danielsson serious about these accusations? He believes that privatization is at the heart of the difficulties? We've heard exactly the opposite of course when it comes to American and British central banks. The Federal Reserve is said to function well (it doesn't) because it is in private hands and immune to political influence (it's not). It's a good sound bite, of course, to say a central bank functions well because it is private, or is well regulated because it is public. But it likely doesn't make any difference.

That's because the institution itself is fatally flawed. If the American or European central bank broke down, and investigations were held into the relationships, all holy hell would likely break loose. How can it be otherwise? These central banks are run by small groups of (mostly) men, who grow up with each other and go to the same clubs and run in the same social circles and have the same interests.

In the case of the Federal Reserve, the best of Goldman Sachs tend to matriculate to government work, and to believe that Goldman Sachs has not benefited from its relationships at the highest levels of Western government is likely naïve in the extreme.

According to Danielsson, the Iceland crisis is "unique among European financial institutions." In fact, we believe it is no such thing. If any one of these other institutions crashed, the "uniqueness" would turn out to be commonplace. The interwoven old boys network does not stop at the doors of central banks. Central banking IS an old boy's network. It is the best and biggest network of all. In this one, you actually get to print money, and if anyone asks you for an accounting, you simply claim that if you release too much information, you will destabilize this or that financial institution.

We think there is a reason that the Federal Reserve, for instance, is resisting the Congressional move for a thorough audit, and it has little to do with a professed concern for the destabilization of banking institutions. We believe, as with Iceland, that central banking is infested with private dealings in millions and even billions of dollars. How could it be otherwise?

Conclusion: Central banking is a franchise of the utmost power and authority, but the men who run it are neither priests nor eunuchs. They are merely human beings, and, after all, while power corrupts, infinite power corrupts infinitely. Only the market itself can guarantee a level playing field. A market-based gold and silver standard would do away with the suspicions that are rife when it comes central banking. The smallest central bank in the world is central to a financial scandal that threatens to engulf much of the West. What secrets must the larger banks hold?

Moral Hazard and Economic Donkeys

"It's almost as if the biggest credit bubble in history never occurred. Investors are increasingly convinced that a sustainable global recovery is emerging out of the wreckage. All praise to the central bankers for saving the world! I'm waiting till someone writes about the return of the Great Moderation and suggests Ben Bernanke is the new Maestro. Then I'll know the lunatics have taken over the madhouse...yet again." Albert Edwards, Société Générale

What Simon Johnson is describing in this essay attached below is moral hazard, the corruption of the capitalist system introduced by a Fed (the Economic Donkeys) that recklessly exercises a function as 'lender of last resort,' in conjunction with a political environment (less sophisticated Economic Donkeys) that can be politely described as being driven by 'regulatory capture' rather than the less euphemistic 'rampant corruption.'

Moral hazard is not a popular topic, on the left or on the right. When moral hazard was mentioned as a consideration in the bank bailouts proposed by then Treasury Secretary Hank Paulson, a popular liberal economist bombastically expounding with a blog (PLEBEWAG) went into a hissy fit of self-righteous indignation, condemning those who even think about things like 'moral hazard' as fundamentalist ethical Luddites.

The problem is that moral hazard is an ethical consideration, a restraint on the tools available for centralized financial engineering. This aversion to restraint is characteristic of neither the moderate right nor the left per se, but it does distinguish the statists from those who favor the individuals and 'market-based capitalism.'

What can one think about these things, when so many economists can get it so wrong, for so long, with such passionate intensity, and remain largely unapologetic and unchanged themselves, swearing allegiance to the power of financial engineering with just a little more power and purview? Hence the proposal to centralize regulation in the Fed, surely one of the most bizarre suggestions after a crisis caused by the Fed that one can imagine.

It is all part of the momentum of the status quo, those who enable a system at least in part because they believe it in as a first principle, benefit from it, even if they are not direct participants, or may only wish to be beneficiaries of the greater power and prestige of the State.

It is an essay worth reading. Here is a relevant excerpt.

Until the Banks are restrained, and the financial system reformed, and balance restored to the economy, there can be no sustained economic recovery.

Or anything resembling a return to the moral high ground or social justice.

"The real problem with our financial system is that our economic and political system work together to encourage excessive risk, and this risk in turn leads to cycles of prosperity and collapse. In 1998, a much smaller Lehman Brothers was placed in financial peril by the aftermath of the Asian financial crisis and failure of Long Term Capital Management, a major hedge fund. The Federal Reserve responded by lowering interest rates and other central banks followed suit. This reduced the cost of obtaining funds, effectively bailing out Lehman and other institutions in trouble.

As markets have grown to recognize how quick the Federal Reserve is to bail out institutions (and executives) in trouble, they naturally respond. In the 1990s, people talked about the “Greenspan Put” a term which derisively suggests that it is always safe to invest in risky assets, because the Federal Reserve is ready to bail out investors (a put is effectively a promise to buy an asset at a fixed price if you are unable to sell it to someone else at a higher price – this is a way to lock-in profits or limit losses on investments). However, in months following the collapse of Lehman, we learned that the “Bernanke Put” is even more valuable since Chairman Bernanke, alongside the Bank of England, the European Central Bank, and central banks in much of the rest of the world, is prepared to take drastic measures to prevent asset prices from falling when there are risks of global collapse.

This policy of responding to the aftermath of bubbles, rather than addressing them before they get going, through tighter regulation, has become the mantra of most central banks. It is usually combined with fiscal policy stimulus and other measures to support the economy. Each time banks fail, by bailing the system out again, we teach our finance sector a lesson: you can safely take too much risk because, when you lose, the taxpayer will pick up the bill. We also send a simple message to creditors: it is safe to lend to Goldman Sachs, or Barclays Bank, because taxpayers and our nations’ savers are standing by to cover your losses. Rational bank executives and creditors respond as any person would: creditors lend to banks at low interest rates, and our banks gamble heavily hoping to make large profits. Such a system is destined to fail, but the party can run for a long time."

Economic Donkeys by Simon Johnson and Peter Boone

H&S Top and "Iron Cross" on Weekly Dollar Chart Targets 66

The weekly chart on the US Dollar Index has rather awful technicals, as it has dropped to a recent low, and set the 'iron cross' in the moving averages that is generally the hallmark of a sustained decline.

There is a massive Head & Shoulders formation that *should* preclude a rally over 81 if it is working, limiting any gains to a further 'right shoulder.'

The ultimate objective of this formation remains 66 for this leg of the large formation.

It is difficult to square this with a technical outlook that includes a major decline in the US equity indices, since the pairs have been running inversely, that is, dollar down, and stocks up.

Anything is possible, especially when the governments are actively and aggressively 'tinkering' with the markets. It is possible that the Fed monetizes sufficiently to reinflate an equity bubble, essentially whoring out the Dollar and the real economy for the sake of the financial or FIRE sector.

Signs of an Approaching Decline in US Equities That Could Be Quite Impressive

There is a strong correlation between this US equity rally and the Fed monetization of debt, which indicates a 'hot money' flow into US stocks but with thin volumes from a significant market bottom. This points to 'technical price trading' by the financial sector, also known was price manipulation, or trading stocks like commodities.

Continued heavy insider selling from those with the best forward view of the real economy is a clear sign of a top. No one can trust what the Fed or the Administration are saying about an economic recovery, as much now as ever. Obama's administration is no reform government.

This surprisingly robust rally in US Treasuries is remarkable given the decline in the US dollar, based in part on a strong yen and carry trades. The short end is obviously quantitative easing, with strong buying from Asian central banks dumping Agency debt but continuing to manipulate their currencies. 'Free trade' is an illusion.

The long end rally in Treasury suspect is likely interest rate manipulation by the US Fed and its central bank cronies. It has been a huge mistake to allow the Fed to perform the non-traditional printing that young Ben touted so proudly in his famous essay. Clever in the short term is too often tragic overall.

Gold and silver are surging as investors largely outside the US seek safety in harder assets.

There is also a community of small speculators outside the US which has been buying stocks on dollar weakness, to play an arbitrage with their own currencies. There is a hot money crowd in eastern Europe for example, and in Asia. And so far this year it has been working. At some point that door will close, quite hard, and many will be caught offsides and out of luck.

A dollar devaluation? Technically one cannot officially devalue the dollar per se because it has no official peg. The more appropriate term is debasement perhaps, and de facto default, but the effect is the same; a decline in purchasing power by the dollar vis a vis other monetary instruments. But for now we are in a monetary matrix, and the central banks and their minions can continue to play their game.

Besides being the hallmark of markets made sick by central bank and other official manipulation, these are signs that indicate that the 'smart money' is battening down the hatches for a very rough September and October in US equities as the pros hand off their latest Ponzi scheme to the public.

We will not be surprised if there is a significant decline, first to a pullback of about 7 to 10 percent. Then we will see if the market can rally on renewed dollar devaluation and if not, then another major slide to test lower levels.

If there is an 'event' the pros will dump the market bids quite hard, perhaps precipitously. It is always easier to complete a market wash and rinse when a scapegoat is available.

Obviously no one can predict the future with certainty, and even within clearer trends the actual timeframes are always most difficult if barely possible when the markets are dominated by computer manipulation. But the auspices are ominous indeed, and we are proceeding with caution.

Until the banks are restrained, and the financial system is reformed, and the economy is brought back into balance, there can be no sustained US recovery.

CNN Money
Insiders sell like there's no tomorrow
By Colin Barr, senior writer
September 11, 2009: 7:27 AM ET

Corporate officers and directors were buying stock when the market hit bottom. What does it say that they're selling now?

NEW YORK (Fortune) -- Can hundreds of stock-selling insiders be wrong?

The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as U.S. job losses have slowed and credit markets have stabilized.

But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.

While a wave of insider selling doesn't necessarily foretell a stock market downturn, it suggests that those with the first read on business trends don't believe current stock prices are justified by economic fundamentals.

"It's not a very complicated story," said Charles Biderman, who runs market research firm Trim Tabs. "Insiders know better than you and me. If prices are too high, they sell."

Biderman, who says there were $31 worth of insider stock sales in August for every $1 of insider buys, isn't the only one who has taken note. Ben Silverman, director of research at the InsiderScore.com web site that tracks trading action, said insiders are selling at their most aggressive clip since the summer of 2007.

Silverman said the "orgy of selling" is noteworthy because corporate insiders were aggressive buyers of the market's spring dip. The S&P 500 dropped as low as 666 in early March before the recent rally took it back above 1,000.

"That was a great call," Silverman said. "They were buying when prices were low, so it makes sense to look at what they're doing now that prices are higher..."

Obama to Make A "Major Address on the Financial Crisis" On Monday

This news has appeared on the Agence France-Presse (hat tip Michel Proulx) and I have translated this into English for now.

One has to wonder if the great Speech Organizer will actually say anything that is worthy of the adjective, "major."

Someone has possibly told him that if he makes speeches often, it will reassure the people of his country, in the manner of Franklin Roosevelt's "fireside chats" from the 1930's.

This sort of remedy wears thin quickly if one has nothing of substance or new to say. Roosevelt had a great flair for oratory, but first and foremost he was a man of substance and of action, like him or not. He was an experienced governor, and knew how to lead by action and example, as well as by words.

It also appears that he wishes to 'send a message' to the G20 about their upcoming meeting at the end of September. He is setting the tone, as he most recently did before the Congress with regard to his health care reforms.

President Obama may seem to many to be a man only of words, of rhetoric, treading lightly on the status quo especially when dealing with the corporate funders of his political party, the banks and the health corporations. This is a great obstacle to his Presidency.

He has perhaps another six months to change this perception, or deliver his Party to a serious setback in the 2010 mid-term elections.

In the meanwhile, gold and silver appear to be an attractive hedge against incompetence.


Agence France-Presse
Discours "majeur" d'Obama sur la crise financière lundi
Publié le 10 septembre 2009 à 20h44

(translation into English)

U.S. President Barack Obama will deliver a speech on this coming Monday, described as "major" by the White House, on the financial crisis, one year after the collapse of Lehman Brothers and ten days before the G20 summit, his administration announced Thursday.

It will address the strong measures that his administration has taken to move the economy from the abyss, its commitment to reducing the role of government after their recent interventions in the financial sector, and the need for the United States and the international community to prevent the repetition of such a crisis...

The developed countries and major emerging economies are striving to overcome their differences and agree on measures to prevent a repetition of financial crises, and also to appease those who are outraged by the excesses of the financial sector.

The G20 leaders will be in Pittsburgh on 24-25 September. Mr. Obama intends to advance the proposal for new "rules of conduct" in finance.

With the prospect of the end of the recession, Mr. Obama will also put the fight against unemployment at the center of their discussions.

Japan: The Triumph of Crony Corporatism Over the Individual

Japanese officials sometimes have the endearing quality of coming out and openly saying what they are doing, or intend to do, in support of dodgy political and financial arrangements that would make a Wall Street banker blush, if they are still capable of such an act of modesty.

The former Japanese Central Banker Toshiro Muto said in March that '"in principle equity values should be set by the market and authorities should avoid manipulating prices because doing so would hurt the stock market’s reputation."

Apparently in this case 'in principle' means 'theoretically, as is convenient," because Mr. Muto goes on to recommend that the Japanese Central Bank and government throw principles aside and buy stocks to support the Japanese banking cartel, which has crippled that country for the past fifteen to twenty years.

Notice how in his talk, Muto says that this arrangement will be temporary, until Japan can export its way out of its financial difficulties.

The challenge might be that most of the countries intend to 'export' their way out of their central bank created economic difficulties. China and India have already passed on the notion of becoming mass importers in the foreseeable future.

Perhaps the fate of the world rests on the ability of the nations of Africa and Polynesia to obtain the suitable credit ratings and FICO scores to become mass consumers with debts that can not possibly ever be repaid, à la mode Amerique? Is South America willing to once again mortgage its future for the sake of the financiers? I am sure that any appropriate arrangements can be made by the Central Banks with the target nations' ruling elites.

Japan is one of the worst examples of crony capitalism in the world. Its ruling LDP party has been a disgraceful example of serving private corporate interests, and acting without honor, honesty, and integrity.

Why doesn't the Bank of Japan just give the money to the banks, and let them buy stocks higher using leverage in the futures index markets like the Anglo-American crony capitalists? This is considered much more respectful of the market driven economy in the West.

"As the boom developed, the big men became more and more omnipotent in the popular or at least the speculative view... the big men decided to put the market up, and even some serious scholars have been inclined to think that a concerted move catalyzed this upsurge." J. K. Galbraith, The Great Crash of 1929

After all, as the industrialist, financier, and Democratic National Chairman John Jacob Raskob observed in August 1929, "Everybody ought to be rich." And so for a time they were, seemingly all powerful, invincible, as gods.

And the abyss swallowed them all. And then the descent into madness in Asia, Africa, the Mideast, and in Europe: and finally a world in flames. Monstrous actions done in the name of economic necessity, room for growth, fuel for industry, a new order for the ages, and at all times the will to power of the few. All the gods of greed.

And at last, the twilight of the gods. Götterdämmerung. Until the old gods rise again.

And so here we are, trembling at the veil.

(Note: this news piece below is not current. It is from earlier this year. It demonstrates the 'roots' of the rallies which we are seeing today in the world bourses. They are an illusion.)

Bloomberg
Japan May Need to Buy Stocks, Ex-BOJ Deputy Muto Says
By Mayumi Otsuma

March 10 (Bloomberg) -- Former Bank of Japan Deputy Governor Toshiro Muto said the government and the central bank may need to buy shares temporarily to support the country’s ailing stock market.

When global equities plunge, “it’s very meaningful for the government’s share-buying institution and the Bank of Japan to buy stocks to support the market,” Muto said at a forum co- hosted by Bloomberg News in Tokyo today. “However, such purchases cannot last forever and should be justified only as a tool to avert a crisis.”

The Nikkei 225 Stock Average is at a 26-year low, eroding banks’ capital and making them reluctant to lend. Finance Minister Kaoru Yosano said today that the government has a “strong will” to combat the credit squeeze resulting from the stock-market slump.

Muto, currently head of the Daiwa Institute of Research, added that "in principle" equity values should be set by the market and authorities should avoid manipulating prices because doing so would hurt the stock market’s reputation.

The government has already allocated 20 trillion yen ($203 billion) and the Bank of Japan has set aside 1 trillion yen to buy shares owned by banks. Yosano last month ordered lawmakers within the ruling Liberal Democratic Party to study ways to bolster stocks, including the feasibility of the government directly purchasing equities in the market.

Keidanren’s Plea

Keidanren, Japan’s largest business lobby, yesterday called on the government to allow a public entity to sell state-backed bonds and funnel the proceeds into the flagging stock market.

The Nikkei slid 0.4 percent today to 7,054.98, the lowest since October 1982, on concern shrinking global demand and rising fuel prices will weigh on company earnings.

An unprecedented drop in exports since last quarter has forced Japanese manufacturers to cut production at a record pace and fire thousands of workers. The central bank forecasts the economy will shrink 2 percent in the year starting April 1, the worst in 60 years.

Muto said exports will drive Japan’s eventual recovery. Deflationary risks outweigh concerns about inflation in the world’s second-largest economy, he added.

Muto served as the central bank’s deputy chief for five years following a 37-year career at Finance Ministry. He was the government’s first choice to succeed Toshihiko Fukui as governor last year, only to be rejected by the opposition- controlled upper house, which said his stint at the ministry may hamper the bank’s independence.

Barrick Capitulates

Barrick Gold and their bullion bank partner J.P. Morgan were the target of lawsuits by the gold bulls, most recently Blanchard and Company, for price manipulation through the use of forward sales in their hedge book. The contention was that the selling was being used to manipulate the price of gold.

Barrick's initial defense was that if they were acting in conjunction with the central banks, they were therefore immune from prosecution since the central banks are immune from prosecution. Details of that story are here. The public document that Blanchard had put forward was shocking in its implications indeed, and can be seen here.

Almost as shocking as the complete lack of interest and follow up in such a potential scandal by the financial community, market regulators, and the media.

One has to wonder what Barrick's management now sees in the precious metal markets, in order to accept this significant shareholder dilution to take down those fixed price contracts now.

On a related note, one of the current largest holders of the gold ETF (GLD) is now reported to be J.P Morgan, which is also a holder of one of the largest short gold positions on the COMEX. There was a bit of a row last year when it was revealed that the rules of the exchange would allow holders of short gold positions to make delivery good in, wait for it, the GLD ETF rather than in physical bullion.

In an ideal, efficient market there would have been transparency and symmetric disclosure of information under the auspices of the CFTC and the SEC, rather than cross accusations and lawsuits. The exact details of what had transpired are not known as the Blanchard lawsuit was settled.

The CFTC seems to be finally willing to act to place position limits on some of the commodity markets, such as oil, that have been the subject of speculative manipulation in recent years. Perhaps some day this will also include other reforms, and will include all the commodity markets.

How sweet it must be for the 'gold bugs' who had repeatedly cautioned Barrick's management on their use of hedges and fixed priced arrangement with the bullion banks.

Although for a large shareholder or group of shareholders in Barrick, one would think that a much more complete disclosure of the nature of this loss and the counter parties would be expected. How involved was J. P. Morgan? Was the Federal Reserve or any other central bank an actual counterparty or collaborator as Barrick apparently claimed in court in 2003? Does this have anything to do with China's recent position on derivatives obligations held by its State Owned Enterprises?

It does sound like there is now a Barrick put under the price of gold, in addition to the China put, that is, a floor under the price of the metal in the front month or spot markets.

In these opaque markets one can still only wonder what is really going on behind the scenes, in a number of financial arrangements. Yes we can.

Reuters
Barrick to Sell $3 Billion in Stock to Buy Back Hedges
By Cameron French
Tuesday, September 8, 2009

TORONTO -- Barrick Gold, the world's biggest gold producer, said on Tuesday it will issue $3 billion in stock and use the proceeds to buy back all of its fixed-price gold hedges and a portion of its floating hedges.

Barrick will take a $5.6 billion charge on its third-quarter earnings as a result of the move.

During times of weak prices, gold miners often sell a portion of their future production to protect, or hedge, against the possibility that prices will fall.

When prices rise, as they have done since 2001, the company suffers because value of the future production they've sold does not increase with the gold price. (The central banks of the world have turned from net sellers to buyers of gold this year, led by the BRIC countries who wish to hedge their reserves against a declining dollar - Jesse)

"The gold hedge book has been a particular concern among our shareholders and the broader market, which we believe has obscured the many positive developments within the company," Barrick Chief Executive Aaron Regent said in a statement.

Barrick stopped hedging, or forward-selling, its gold in 2003.

It exited its production hedge book two years ago, and the company has faced repeated questions from analysts and shareholders since then about its plans for the remaining 9.5 million ounces it had hedged to finance projects.

The equity deal comes as a resurgent gold price and healing credit markets have prompted investors to snap up gold stocks, bullion and equity.

The metal's price hovered just below $1,000 an ounce on Tuesday.

Barrick will issue 81.2 million shares at $36.95 a share, a 6 percent discount to the stock's New York closing price of $39.30 on Tuesday.

The company will use $1.9 billion of the proceeds to eliminate all of its fixed-price gold contracts -- on which the company effectively lost money every time the gold price rose -- by purchasing gold on the open market and delivering it into the contracts.

It will use about $1 billion to eliminate some of its floating spot price contracts. (Are they buying them out from the counterparties? Is J. P. Morgan one of them? - Jesse)

After the deal, Barrick will still hold floating hedges with a negative mark-to-market value of $2.7 billion, but the $5.6 billion charge will remove it from the balance sheet. (It sound as if they are writing them off as a loss - Jesse)

Bill O'Neill, a partner at LOGIC Advisors in Upper Saddle River, New Jersey, said the deal would not likely have a material impact on the gold market. (Off the cuff, the Barrick statement implies that they will be purchasing 4% of total world production in the open market for bullion which is already tight at these prices in addition to taking an enormous amount of forward selling off the market. Unless, of course, they can take delivery directly from existing reserves, such as from the Fed via the IMF. - Jesse)

US Dollar Seasonality

Rough seas ahead for Uncle Buck.



Chart Courtesy of ContraryInvestor.com

Fed: Consumer Credit Contracted at an annual rate of 10 1/2 Percent

Federal Reserve G.19 Report

Consumer credit decreased at an annual rate of 10-1/2 percent in July 2009.

Revolving credit decreased at an annual rate of 8 percent, and
nonrevolving credit decreased at an annual rate of 11-3/4 percent.

Cuomo: Bank of America Officials May Be Charged

The charges center around the acquisition of Merrill Lynch, and the lack of disclosure regarding losses, and the accelerated bonuses paid to Merrill.

Cuomo also cites their indiscriminate use of attorney - client privilege to mask wrongdoing.

Cuomo's action is a slap at the SEC which has crafted a settlement with the Bank, which has been challenged repeatedly by the Judge as a wristslap, defying commen sense and basic justice.

This comes as the SEC faces further charges of a whitewash of their involvement with the Madoff Ponzi scheme scandal, and the lack of discovery of the fate of the billions which Madoff took from investors.

Reminds one of the Spitzer actions as the New York Attorney General in which he brought Wall Street to judgement and a settlement on its scandals regarding analysts improper rating of stocks from the tech bubble. There had been repeated attempts by the federal regulators to short circuit Spitzer.

Reuters
UPDATE 1-NY's Cuomo may charge BofA execs over Merrill
Tue Sep 8, 2009 3:05pm EDT

NEW YORK, Sept 8 (Reuters) - New York's attorney general threatened on Tuesday to file charges against top executives of Bank of America Corp over the disclosure of details regarding bonuses it authorized to Merrill Lynch & Co employees before the company's merger.

Andrew Cuomo, the attorney general, made the threat as U.S. District Judge Jed Rakoff considers whether to approve the bank's $33 million civil settlement with the U.S. Securities and Exchange Commission about the disclosures.

The judge has rejected the settlement twice, and Bank of America and the SEC are expected to made new submissions in the matter by Wednesday.

Cuomo accused Bank of America of using a defense of attorney-client privilege to explain why it should not release more information about who authorized the payment of billions of dollars of bonuses.

"We cannot simply accept Bank of America's officers' naked assertions that they sought and relief on advice of counsel in good faith, and that, therefore, they should not be charged," Cuomo wrote in a letter to the bank's lawyer.

He gave the bank until Sept 14 to provide more information.

Bank of America did not immediately return a call seeking comment. (Reporting by Jonathan Stempel; Additional reporting by Elinor Comlay and Grant McCool; Editing by Ted Kerr)

China Admonishes US Monetization, Sees a Hard Fall for the Dollar Over Time

China is saying many things which are true.

They are also omitting many things that are key to the cause of our financial problems. They bought the silence of a succession of US political administrations over their blatant currency manipulation in support of trade subsidies, including the outright contributions to Clinton and Gore, and the cronyism with Bush.

China is a significant part of the problem, and like so many dogs that Wall Street helps to set up to further their gains, this one refuses to wag its tail on command.

The blowback on the US dollar will be significant.

Telegraph UK
China alarmed by US money printing
By Ambrose Evans-Pritchard
Cernobbio, Italy
9:06PM BST 06 Sep 2009

The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".

"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said. (China is already a strong buyer in the precious metals markets, and is encouraging its citizens to buy gold and silver as well - Jesse)

China's reserves are more than – $2 trillion, the world's largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added. (The short interest being held by three or four US banks is grown remarkably large. As Barrick gold claimed in their lawsuit with JP Morgan by Blanchard, they are being backstopped by the US government. Larry Summers has been a long time proponent of controlling the price of gold to influence longer term interest rates. See his paper on Gibson's Paradox. Greenspan understood the same relationship all too well, as does Bernanke. - Jesse)

The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction. (The other central banks of the world have put a significant halt to their own selling, now realizing that the US Federal Reserve and Treasury are fighting a losing battle. - Jesse)

Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise. (How about releasing the peg to the US dollar and allowing the yuan to appreciate, dampening your exports, Uncle Cheng? Along with encouraging domestic consumption and higher wages. - Jesse)

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down." (Apparently the Chinese do not lie to their people yet about the true state of their economy. Greenspan and Geithner have much to teach them. - Jesse)

Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.

"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity." (He didn't go wrong. He did not care. He was willfully blind. He was brought in to the banking ponzi scheme in 1996 - Jesse)

Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery. (We should have NO illusion about China doing anything to promote imports and growth for anyone but themselves, ever. It is not a free market, it is a command economy with a strong mercantilist bent. - Jesse)

China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult". (No it is not. It is hard because the Chinese elites are afraid to lose control of the country to a growing merchant and middle class. - Jesse)

Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China. (One of the root causes was the devaluation of the Chinese yuan in the mid-1990's, and the allowance thereafter of China into most favored nation trading status with the US after making considerable contributions to Bill Clinton and Al Gore, through the Chinese military. Remember that scandal? - Jesse)

"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis...."

(Perhaps it is more correct to say that we have this crisis because statist governments and crony capitalists continually interfere with market mechanisms, creating unintended consequences and downtream crises that are growing increasingly severe and systemically threatening. - Jesse)

The Will to Power and Its Followers in the Socially Immature

"I am afraid we may have, in the near future, friendly fascism. And I do not use the term lightly. I grew up under fascism, in Franco’s Spain, and if nothing else, I recognize fascism when I see it. And we are seeing a growing fascism with a working-class base in the U.S. This is why we cannot afford to see Obama fail. But his staff and advisors are doing a remarkable job to achieve this. Ideologues such as chief-of-staff Rahm Emanuel (who, when a congressman, was the most highly funded by Wall Street) and his brother, Ezekiel Emanuel (who did indeed write that old people should have a lower priority for health care spending) are leading the country along a wrong path."

Vincente Navarro, Obama's Mistakes in Health Care Reform

Vincent Navarro writes an amazingly insightful political analysis of health care reform and the Obama Adminstration. This is as we would expect, since Navarro, is an M.D., Ph.D., and professor of Health Policy at The Johns Hopkins University and editor-in-chief of the International Journal of Health Services.

But then he goes on to end his essay with this remarkably bad prescription.

"Given this reality, it seems to me that the role of the left is to initiate a program of social political agitation and rebellion (I applaud the health professionals who disrupted the meetings of the Senate Finance Committee), following the tactics of the Civil Rights and anti-Vietnam War movements of the 1960s and 1970s. It is wrong to expect and hope that the Obama administration will change. Without pressure and agitation, not much will be done."

The Will to Power has a bewitching siren call. It offers simple solutions to complex problems. It provokes the cycle of problem - reaction - solution, and the eye for an eye approach that 'makes the whole world blind.'

"Communism and fascism or nazism, although poles apart in their intellectual content, are similar in this, that both have emotional appeal to the type of personality that takes pleasure in being submerged in a mass movement and submitting to superior authority." James A. C. Brown

And yet, like most dark powers, it decimates and destroys who pick up the sword, and lays waste to them, their country, and their children.

This is the lesson of history, the abyss of madness into which a great leader can bring a nation once it loses its sense of proportion, that people in their passionate desire for power often forget.

Peter Schiff on the Surge in Gold; Jesse Weighs in on Inflation and Deflation

Peter Schiff has not always been correct, most notably on the decoupling theory of foreign markets with the US, and the desirability of their equity markets, at least so far.

It is the case, of course, that the US lagged emergence from the Great Depression as compared to a number of overseas economies, for a variety of reasons on which we have speculated in the past.

Will this happen again? Perhaps, we cannot know. But the US is 'ground zero' for the Wall Street debt fraud and bubble economy based on the dollar reserves, and seems utterly incapable of taking action except to print more money and give it to Wall Street.

The decline in the value of the dollar does seem like a very high probability, as well as the rather severe stagflation which this may eventually produce. On this point Mr. Schiff seems most insightful, especially compared to the commentators on financial television.

The discussion which Peter has towards the end is particularly interesting about inflation and deflation. We tend to diverge again a bit from his analysis there however. He references monetary inflation. But this is not the only cause of price change.

There are definite and easily observable deflationary forces at work in the economy today in the form of slack demand, unemployment, and net credit contraction. This is putting severe downward pressure on prices as one would expect.

This will become worse as people realize that our current 'recovery' is a public relations event, and it may even result in a 'credit crunch' once again as it did last year. This is the 'dollar short' phenomenon that we have described, which particularly impacted European banks holding dollar assets.

At the same time, Bernanke has the printing presses running from the Adjusted Monetary Base up, and is pushing on the monetary inflation button, monetizing bad debts of non-traditional sorts, and weakening the dollar.

Foreign holders of US debt are starting to make their first moves in this game of prisoner's dilemma. At some point if confidence breaks, things might start moving much more quickly. Until then it will be a slow grind, an erosion of value and wealth.

The general American public is, in a sense, caught in the middle, with a lack of jobs and income for the working classes, but higher prices in imports and essentials. This is the stagflation outcome which we had feared. One bright spot is that it might be good for exports, if the Asian countries can generate domestic consumption and decide to free up access to their markets.

See Price Demand and Money Supply As They Relate to Inflation and Deflation You might also take a look at Some Common Fallacies About Inflation and Deflation.

Inflation and Deflation are not linear, that is, not straightforward and simple economic functions with a few variables, except at the tails of probability where the power of the extreme crushes the equation into simplicity by overwhelming other factors into insignificance. You print enough dollars, and consumer demand matters much less as an input to inflation.

Approaching the future with one dimensional game plans can be quite risky. But for some reason gold, and to a less extent silver, always appear to work to some degree in the solution mix, hence their continuing rally despite the best efforts of the powers that be to talk them down. As Bernard Baruch famously observed, "Gold has 'worked' down from Alexander's time... When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory."

The lack of coherent financial reform from the Obama Administration, and their ludicrous proposal to create a 'super-regulator' in the privately owned Federal Reserve, after a landslide victory in an election based on change and reform, is an outcome almost too bizarre to be believable. Unless, that is, you accept that Obama and those around him are either incredibly naive or corrupt. We suspect that as in all things it is some of both.

By the way, in case you missed it, Charlie Rangel, in charge of Ways and Means and the major proponent of a new military draft, is being investigated as another tax cheat among the Democratic leadership.

Do these people take us for imbeciles? Do they think that the world does not see their corruption, their greedy, devious nature when it is not masked by a captive media, and is not repelled by it?

In 2005 we forecast this very outcome, that Wall Street and their cronies would push their schemes beyond all reason, like drunk drivers or addicts who cannot quit, until they create a cathartic, catastrophic event which will cause someone to finally take away their keys at the last.

That time is approaching. No one can predict exactly when, but it is there. Make sure you are wearing your seat belts.

"There is precious treasure and oil in the house of the wise, but a fool consumes all that he has and saves none." Proverbs 21:20

(hat tip to Denver Dave for the link)

Stiglitz on the Financial Crisis

Joe Stiglitz describes the current financial crisis and prospective recovery quite well, and the conclusions he draws are remarkably similar to our own which is gratifying.

It's good to hear these things from a distinguished Nobel laureate, and not just from your humble Propriétaire, while puttering over his daily bread.

Bloomberg
Stiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’
By Michael McKee

Sept. 4 (Bloomberg) -- The U.S. economy faces a “significant chance” of contracting again after emerging from its worst recession since the 1930s, Nobel Prize-winning economist Joseph Stiglitz said.

“It’s not clear that the U.S. is recovering in a sustainable way,” Stiglitz, a Columbia University professor, told reporters yesterday in New York.

Economists and policy makers are expressing concern about the strength of a projected economic recovery, with Treasury Secretary Timothy Geithner saying two days ago that it’s too soon to remove government measures aimed at boosting growth.

Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of “malaise,” in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn -- an occurrence that economists call a “W-shaped’ recovery.

“There’s a significant chance of a W, but I don’t think it’s inevitable,” he said. The economy “could just bounce along the bottom.”

Stiglitz said it’s difficult to predict the economy’s trajectory because “we really are in a different world.” He said the crisis of the past year was made worse by lax regulation that allowed some financial firms to grow so large that the system couldn’t handle a failure of any of them.

Big Banks

“These institutions are not only too big to fail, they are too big to be managed,” he said.

Finance ministers and central bankers from the Group of 20 nations meet in London Sept. 4-5 to lay the groundwork for a summit in Pittsburgh later this month, where leaders will consider measures to overhaul supervision of the financial system...

With so much excess capacity, the American economy faces a short-term threat of disinflation and possibly deflation, Stiglitz said. Wages may even decline, given recent high productivity and the likelihood of an extended period of high unemployment, he said.

Longer term, he said the Fed’s aggressive monetary policy will mean inflation becomes the greater threat. “With the magnitude of the deficits and the balance sheet of the Fed having been blown up, it’s understandable why there are anxieties about inflation,” he said.

While the Fed says it has the tools to deal with it, there are still concerns, Stiglitz said. Because monetary policy takes six to 18 months to have its full effect, the central bank will have to begin withdrawing monetary stimulus on the basis of forecasts.

The Fed’s record on its economic forecasts isn’t enough to reassure investors and, as a result, the U.S. currency may suffer, he said.

Dollar ‘Weakness’

“Whether or not they’re able to do it, the uncertainty today about whether they can do it can contribute to the weakness of the dollar,” Stiglitz said. “That’s one of the reasons there is increasing interest around the world in discussing alternatives to the dollar system.”

Stiglitz, who is a member of a United Nations commission that will study the global financial system and currency regimes, said “the logic is compelling” for a new global currency.

The current system creates instability, weakens global confidence, and is fundamentally unfair to developing countries that are in essence lending the U.S. trillions of dollars and bearing the risk, he said.

“In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way,” Stiglitz said. “The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done.”

While some think it would hurt the U.S. to no longer be able to borrow cheaply in dollars, “that era is over,” he said. “We’re moving to a more multi-polar world.”

Between the fall of the Berlin Wall and the collapse of Lehman Brothers was “the short period of American triumphalism, where we dominated the global scene. That period is over,” Stiglitz said.

Five Reasons for the Recent Surge in Gold

1. Seasonality



2. Continuing Risks in the Financial System



3. Moral Hazard: Tipping Point In Confidence From Over a Decade of Monetary and Regulatory Policy Errors






4. Blowback from Banking Frauds on the Rest of World



5. A Failure in Political Leadership to Deliver Essential Reforms

"Let's Just Whack the Oil"

“The markets used to be about capital formation,” said Mr. Quast, the consultant. “Now 80 percent of trading is driven by some form of statistical arbitrage. We are buying into a statistical house of cards that could unravel very quickly.”

Reading the NY Times article excerpted below, one finds that Optiver is a rather small time operation with a wonkish bent operating out of the Netherlands, with profits that barely match a decent US tradering department's annual bonus.

But the method which they are using is similar to the techniques being used by many of the large 'market makers' who are 'providing liquidity' while reaping large and improbably consistent profits by manipulating markets.

The manipulation itself is nothing new. Large Wall Street banks have been using their size to push the markets around for many years, as in the case of Citigroup which was caught manipulating prices in European bond trading. Citigroup Fined Over 'Dr. Evil Bond Strategy

Then of course there was the manipulation of the energy markets by Enron, which held the state of California hostage.

The difference is that in the past the manipulation was implemented using the size of the trades and the deep pockets backing them. Size mattered, and the techiques were not elegant, more like an old-fashioned smash and grab.

Today the bias is towards stealth and speed, and colocation of your trading daemons with the Exchange to obtain an edge on information and execution. Having key regulators and politicians on your payroll is always a plus in any organized criminal activity.

No wonder China is so angry about the derivatives losses being realized by their State Owned Enterpises. The manipulation around key prices and dates in many US markets has been apparent for some time, with a wink and a nod around option expirations for example.

But now this manipulation is getting so blatant and widespread and regular that it is crippling daily market operation, not to mention robbing the general public of millions of dollars every day in their 401K's, pensions, and investment accounts. It has more of the appearance of organized crime than it does of a financial system.

Optiver was guilty of manipulation it appears, but also of being small and Dutch, and a competitor to the larger gangs of New York and London.

It will be more impressive when the CFTC and the SEC finally does something to clean up the markets by taking on the too big to fail banks that are sucking the life out of the US national economy and destroying the integrity of price discovery and the markets around the world.

To accomplish this, the US must dismantle the partnership in profits between Wall Street and the national government, which is morphing into a kind of velvet coup d'etat.

Yes, the markets used to be about capital formation. And capitalism used to involve risk management, with the consequence of profit and loss. But when Robert Rubin, then Treasury Secretary for Bill Clinton decided it was less expensive and more convenient to artificially buy the SP futures market through the Working Group on Markets, and manipulate prices rather than to suffer a messy stock market decline and clean up afterwards, moral hazard was unleashed. And so here we are today

We hope but do not believe that the impetus for reform will come from the US government, or financial industry, or even the voting public which the elites are now ignoring. After all, they don't pay the bills. It will come from the other governments and regulators of the world, who it appears have finally had enough interference and disruption of their economies and markets from US dollar colonialism.


NY Times
Inquiry Stokes Unease Over Trading Firms That Shape Markets
By Landon Thomas Jr.
Published: September 3, 2009

LONDON — Its superfast, supersecret oil trading software was called the Hammer.

And if the Commodity Futures Trading Commission is right, the name fit well with an intricate scheme that allowed commodity traders in Chicago working for Optiver, a little-known company based in Amsterdam, to put their orders first in line and subtly manipulate the price of oil to the company’s advantage.

Transcripts and taped conversations of actions that took place in 2007, included in the commission’s case, reveal the secretive workings of high-frequency trading, a fast-growing Wall Street business that is suddenly drawing scrutiny in Washington. Critics say this high-speed form of computerized trading, which is used in a wide range of financial markets, enables its practitioners to profit at other investors’ expense.

Traders in the Chicago office of Optiver openly talked among themselves of “whacking” and “bullying up” the price of oil. But when called to account by officials of the New York Mercantile Exchange, they described their actions as just “providing liquidity....”

Optiver describes itself as one of the world’s leading liquidity providers, a trading firm that uses its own capital to make markets. It seeks to profit on razor-thin price differences — which can be as small as half a penny — by buying and selling stocks, bonds, futures, options and derivatives. (Derivatives represent about 65 percent of its business, equities 25 percent, and commodities and others make up the remaining 10 percent.)

But the extent to which market making (providing liquidity to markets that need it) and proprietary trading (the pursuit of pure profit with a firm’s own money) can properly coexist has become a thorny question for regulators. They are grappling with an exploding business that makes up as much as half the overall trading in the United States and a growing share in Europe as well...

“These are proprietary trading shops that are masquerading as market makers,” said Tim Quast of Modern IR, a consulting firm that advises corporations on market structure issues.

The Securities and Exchange Commission has opened up an investigation into high-speed-trading practices, in particular the ability of some of the most powerful computers to jump to the head of the trading queue and — in a fraction of a millisecond — capture the evanescent trading spread before the rest of the market does...

Called low-latency trading, this blend of speed and opportunism is the essence of Optiver’s business model.

It deploys a sophisticated software system called F1 that can process information and make a trade in 0.5 milliseconds — using complex algorithms that let its computers think like a trader. And the company is so careful about preserving its secrets that when some traders and engineers left for a rival operation recently, Optiver hired private investigators and subsequently sued the former employees on charges of making off with intellectual property...

Mr. Dowson acknowledges that Optiver was so aggressive in conducting its proprietary trades in some smaller stocks that their activities “were as big as the volume traded on the day.”

It is precisely this — high-powered computers and the swagger of those who operate them — that is causing worries over high-frequency trading’s increasing sway. (No one can touch 'the-bank-that-must-not-be-named' for swagger - Jesse)

“The markets used to be about capital formation,” said Mr. Quast, the consultant. “Now 80 percent of trading is driven by some form of statistical arbitrage. We are buying into a statistical house of cards that could unravel very quickly.”

Hong Kong Bringing Its Gold Home From London

"There is precious treasure and oil in the house of the wise, but a fool consumes all that he has and saves none."
Proverbs 21:20

The People's Republic of China has been urging its citizens to convert some part of their savings into gold and silver, having recently liberalized the procedures by which individuals can obtain it.

Hong Kong has built a new world class bullion vault, and is repatriating its gold reserves from the London Bullion Market Association (LBMA), where some speculate it had been committed for sale many times over. Hong Kong wishes to become its own regional Asia market maker for bullion metals.

The rest of the world will rein in the Wall Street financial establishment, because the bankers have demonstrated an inability to manage their financial affairs honestly, and those of the world.

Strange times indeed, when the hard money capitalists are in Asia, and the fiat money oligarchs and statists are in the Anglo-American West.

Marketwatch
Hong Kong recalls gold reserves, touts high-security vault
By Chris Oliver
Sep 3, 2009, 6:22 a.m. EST

In a challenge to London, Asian states invited to store bullion closer to home

HONG KONG (MarketWatch) -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday.

The facility, industry professionals said, would support Hong Kong's emergence as a Swiss-style trading hub for bullion and would lessen London's status as a key settlement-and-storage center.

"Having a central government-sponsored vault would create a situation where you could conceivably look at Hong Kong as being a hub, where metal could be traded for the region," said Sunil Kashyap, managing director at Scotia Capital in Hong Kong, adding that the facility was the first with official government backing in the region...

CFTC to Begin Releasing New Commitments of Traders Reports on US Futures Markets

A step in the right direction for sure.

A much needed enhancement would be to report the five largest position holders in key markets, on the long and short side over a certain size limit on a weekly basis.

Release: 5710-09
For Release: September 2, 2009

CFTC Implements New Transparency Efforts to Promote Market Integrity

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it will begin implementing new transparency efforts outlined in a July 7, 2009, statement by CFTC Chairman Gary Gensler. Starting Friday, September 4, 2009, the CFTC will begin disaggregating the data in its weekly Commitments of Traders (COT) reports and begin releasing, on a quarterly basis, data collected from an ongoing special call on swap dealers and index traders in the futures markets.

“A core mission of the CFTC is to promote market transparency,” CFTC Chairman Gary Gensler said. “Last September, the CFTC recommended disaggregating our weekly Commitments of Traders reports. In July, I announced that we would also periodically release data on index investors’ participation in the commodity futures markets. I am pleased that as of Friday, September 4, we will be able to take these steps toward increased transparency. For the first time, we will break out managed money and swaps in our COT reports and release information on index investment to give the public a better of view of trading activity in the futures markets.”

Commitments of Traders (COT) Reports

For decades, the CFTC has provided the futures industry with COT reports consisting of aggregated large-trader position data to shed light on the changing composition of the markets. The reports are based on a request by Congress for an annual report, upon passage of original enabling legislation in the 1920’s, and have been intensified over time into weekly reports in several formats and a weekly Commodity Index Supplement for 12 agricultural markets, begun in January 2007.

Beginning Friday, September 4, 2009 (for data as of September 1, the CFTC will publish additional COT data for 22 contract markets, including major agriculture, energy and metals markets. The COT reports currently break traders into two broad categories: commercial and noncommercial. The new reports will improve upon the existing reports by breaking the data into four categories of traders: Producer/Merchant/Processor/User; Swap Dealers; Managed Money; and Other Reportables.

The CFTC intends to produce the same disaggregated data on all of the remaining physical commodity markets for which we currently publish COT data. The agency will continue to also release the traditional COT reports for a transition period until at least the end of 2009. This will allow the public to become familiar with the new reports as well as comment to the CFTC as to any further possible enhancements (Comments should be submitted via email to secretary@cftc.gov by October 1, 2009). The CFTC also plans to soon release three years of historical data for the new report.

The CFTC also is working to create a new COT for all of the financial markets in a form that will improve the transparency of those markets. The categories of this new financial COT may be different from those being applied to the physical markets, described above.

The CFTC is concurrently working on improvements to the agency’s Form 40 and other methodologies to improve the accuracy of trader classifications.

See Disaggregated COT Explanatory Notes under Related Documents for additional information.

Index Investment Data

In addition to disaggregating the CFTC’s COT reports, the agency will begin periodically releasing data on index investment in the commodity futures markets. In September, 2008, the CFTC published a Report on Swap Dealers and Index Traders that was based on data received from our special call authority. The CFTC continued this special call and enhanced the information disseminated in the September report. Starting Friday, September 4, the agency will begin releasing the data on a quarterly basis with a goal of eventually releasing this data monthly.

The new data will include both gross long and gross short positions and will update data in the previously released report to include some additional data.

Martin Hennecke: Protecting Your Wealth in Volatile Markets

"Hennecke stressed that investors should go for physical forms of gold and other
precious metals rather than "paper gold investment scheme where there isn't full
backing, where the metal might be leased out or used for derivatives. That's
crucial because there is 80 times more paper gold in the market than actual
physical metal in existence in the planet."

For the most part alternative currency trades remain 'highly specialized' investments, not often seen in the 401k, IRA, or the average brokerage account.

If gold and silver go mainstream, which they often will do in times of crisis of confidence, the rally may be rather impressive on short covering alone. Expect the exchanges to invoke special rules to allow for settlement of delivery obligation in cash or kind rather than bullion, and at artificially low, albeit significantly higher, prices.

But this may not help those who are holding gold in 'custodial accounts' where the same gold has been lent out to the market and sold, or is loosely mingled with multiples of uncertain ownership.

Can't happen? Who would have thought that one of the largest retail commodity brokerages, Refco, could roll over? Counter party risk is always an issue when you are 'off-exchange.'

“The desire of gold is not for gold. It is for the means of freedom."
Ralph Waldo Emerson

Go for Gold and Silver: Strategist
By CNBC
Wednesday, 2 Sep 2009 2:44 AM ET

China's key stock index recovered its poise on Tuesday, rising nearly 0.5 percent after diving 6.7 percent the day amid liquidity concerns and worries that lending growth may slow in the country. In August alone, the Shanghai Composite lost nearly 22 percent, snapping a seven-month winning streak.

If those stock gyrations are hard to stomach, there are other investment options to help ride out the wild swings in China, according to Martin Hennecke, associate director at Tyche.

For one, Hennecke liked convertible bonds in China, saying he is bullish on the Chinese economy given its fundamental strength, compared to Europe and the U.S. (No thank you for now, its a bubble and a bit less than free market environment, even given its bawdy good time with capitalism over the past ten years. - Jesse)

"Valuation is not as cheap anymore compared to the beginning of the year. Hong Kong-listed China companies are slightly cheaper than (those in) Shanghai," Hennecke said on CNBC Asia's "Protect Your Wealth". " One who plays more cautiously -- convertible bonds in China are an option."

Gold and silver ranked among Hennecke's top recommendations, as China, the world's largest gold buyer this year, is likely to buy more of the yellow metal going forward.

"Whether we see a further crisis or a recovery globally, with inflation coming back up again...gold should do quite well and it hasn't risen much this year yet," said Hennecke.

Hennecke stressed that investors should go for physical forms of gold and other precious metals rather than "paper gold investment scheme where there isn't full backing, where the metal might be leased out or used for derivatives. That's crucial because there is 80 times more paper gold in the market than actual physical metal in existence in the planet."

Hennecke also preferred exposure to direct agricultural commodities, as opposed to investing in commodities through equities, where markets have already rallied sharply.

"Agricultural commodity prices are similar to precious metals. (Prices) across board are mostly dropping, apart from sugar and a few items. So direct commodities are quite undervalued and quite cheap now," he explained. "Agricultural prices are likely to rise quite substantially."

Hennecke expected the investment environment to be volatile, as the U.S. will be saddled with a massive debt load over the next ten years.

"It's tricky to see where stock markets are heading, it depends on how fast inflation feeds through as a result of the debt problems." (Precisely correct, except for those who prefer to see what they have already decided *should* happen. They are often wrong, but rarely uncertain. - Jesse)