What is the 'Spot Price' of Gold and Silver And How Is It Set?

When you ask even a relatively experienced and sophisticated precious metals trader "what is the spot price of gold or silver?' you will generally hear a pause, and then they will come back with a price after checking their computer screen for the latest spot price from some ubiquitous and reliable provider of such quotes, or one of the lesser known, diverse providers of this information.

But when you say, "No what I was asking is 'what is the spot price, where does it come from, who sets it?'" you will most often hear that this is the last physical trade, or the current market price of physical bullion.

Well, is it?

Actually despite what you might think or what you might have heard, it is not.

The reason for this is that there is no centralized and efficient market for the sale of physical bullion in the US at anything resembling a 'spot price.' What is their number, where are their prices and trades posted? Who is buying and selling what, TODAY, with the real delivery of bullion as the primary objective?

There are several large markets for physical bullion in the world, where real buying and selling occurs, with delivery given and taken. The most famous is the London Bullion Market Association, which is an dealer association, over the counter market where the price is set twice a day as the 'London fix' but each counterparty stands on their own with no central clearing authority. From the perspective of bullion the LBMA is 'where the action is' and the Comex is a sideshow. Although there are recent revelations and suggestions that the LBMA is also slipping into a paper market with multiple claims on the same unallocated bullion, fractional reserve bullion banking as it were. Nothing new. It just gets more out of hand at certain times in history.

The reason that physical trading in bullion became so highly concentrated in London was best explained to me by one large bullion dealer. "This situation exists because of the gold confiscation in the US in 1933. When that happened, physical metal trading in the US came to a complete stop. When gold ownership was again made legal on December 31, 1974, the physical metal trading had become so developed outside of the US that it stayed there and never really returned."

But once the London Fix is over, and the day moves around the world, the New York markets open and become more dominant. Where and how is that price obtained? Where is the price discovery.

The fact of the matter is that the bullion market in the US is highly fragmented among many, many dealers in bullion. Yes they have their 'wholesale' sources, but even those sources are more fragmented than I would have imagined.

There seems to be no central market for physical gold and silver in the US, except for the largely paper futures markets. Because the fact of the matter is that the spot price of gold and silver are a type of Net Present Value (NPV) calculation based on the futures price in the nearest month, or the front month.

I had not been able to obtain the actual calculation used by any of the principle quote providers. And I am not saying that they are doing anything wrong at all. Or right for that matter, since I do not audit them or look over their shoulder. I do not know how accurate anyone's reportage might be, or how to explain the discrepancies between the futures prices and the spot prices that occur all too frequently these days. How can one without more transparent knowledge?

For those of you that are familiar with it, the spot price would be calculated from the futures in much the same way that the 'Fair Value' price is obtained for a stock index like the SP from the futures trade, essentially an NPV calculation.

FORMULA FOR DETERMINING FAIR VALUE

F = S [1+(i-d)t/360]

Where F = Fair Value futures price

S = spot index price

i = interest rate (expressed as a money market yield)

d = dividend rate (expressed as a money market yield)

t = number of days from the current spot value date to the value date of the futures contract.

So like most net present value calculations we would have some 'cost of money' figure used to discount the time decay from the strike time of the contract to the present. There is no dividend with gold for example, but there is a lease rate, and a proper calculation should include some allowance for this.

The details are not so important, again as I say, unless you wish to start up your own quotations service, or do your own pricing as a large dealer to make sure you know what a fair price might be.

What is important is that almost all retail transactions for physical bullion in the US key off a 'spot price' that is derived from a paper market which is not based in the reality of physical supply, since the futures exchanges explicitly allow for the settlement in cash if physical bullion is not available. In fact, the vast majority of transactions are settled in cash, and are little more than derivatives bets it seems, and often hedges related to other things like another commodity or interest rates.

So that is the truth of the spot price of gold and silver in the US as best as I can determine it. I am not saying that anyone is doing anything wrong or illegal. I am saying the system is inefficient in that it suffers from the lack of a robust physical market to 'keep it honest.'

Also, almost every trader I speak with does not really understand what the spot price really is, or the implications of what price discovery looks like in a fragmented market where the pricing is set by a group of speculators that rarely deal in the actual commodity itself.

I am surprised that indeed some smart entrepreneur has not consolidated the buying and selling of physical bullion on demand into a highly transparent and efficient market which is the real price setter, rather than the commodities exchanges in which arbitrage can be easily crushed by the very rules of the exchange that allow for unlimited position size, extreme leverage, cash settlement as an easy alternative to shortage, unaudited and unallocated stores of supply, and secrecy. We even recently saw the scandal where a large Wall Street broker was selling bullion and even charging the customer annual storage fees without ever having purchased the bullion for them in the first place!

The actual prices for stocks are published on a price by transaction basis on public exchanges whereas gold and silver have no such facility. That is a key difference, and why the futures market has a significant need for tighter reins on speculation including position limits, accountability for deliverables, and limits on leverage and speculation, more so than any other market. The metals markets are thin and small compared to the forex and financial asset markets, and therefore the most vulnerable when they intermix.

The futures market will be efficient and honest the more it takes on itself the rigors of a physical market. Even Alan Greenspan alluded to this, that the dollar reserve currency standard 'would work' as long as the Fed had the discipline to manage it as if it had the rigor of an external standard like gold. Well, you can toss that vain assumption about the self restraints of human nature out the window. Do you really think that bonus hungry traders are more virtuous and selflessly devoted to the public good than the economists at the Fed? Please.

And I have not spent any time discussing it, but when one has a price that is derived from even a publicly available albeit flawed price like the front month futures, without transparency in the derivation and updating the opportunity to skin pennies all day long is there as a temptation, since there is no official or easily calculable method to check its accuracy.

I contacted a few big dealers hoping to get intimations that there was some sort of a private wholesaler network, in which two or three regional distributors set prices based on available supply. There is a 'dealer market' in which prices in lots of twenty five bars of London ready gold is quoted, but that seems to be part of the parallel market in physical bullion centered around the LBMA that is divergent from the continuous paper price and the 'spot price.'

There is always a wholesale cost and a retail price with a markup. That is not an issue. What seems to be the problem is that when a few players can crush price with paper positions, this tends to remove the discpline of arbitrage of market mispricing from the picture. This is the only part of the efficient markets hypothesis that ever made any sense. If there is a price discrepancy, market players will move in to fill it. This is the case against manipulation.

Except they cannot really address any serious market mispricing because the price is set in the paper markets which are not amenable to efficient arbitrage. Unlimited leverage through derivatives, and the willingness of central banks to sell into the gold market to manage price spikes, again as Chairman Greenspan admitted, takes care of that. Not even a motivated buyer with deep enough pockets like China would take on this market openly because all they would do is buy against themselves, and drive a default which would be cash settled by force.

You might ask at this point, why would anyone ever wish to engage themselves in this market, besides those who must obtain supply for industrial or cosmetic uses? Few do actually, except to buy physical bullion at the retail level, and hold it as protection against the devaluation of currency and the monetization of the debt.

There are always professional speculators, but they tend to go with the momentum for the reasons outlined above. Its an easy trade. I sometimes play the arb myself, or at least maintain an awareness of it. You can't fight the Fed in the short term, and the financial engineers and statists hate anything that threatens to rival or even limit their power. But that does not mean that one might not insure themselves against the eventual failure of the new masters of the universe to control the large forces and unintended consequences of world markets. What I find so disappointing is that Greenspan knew all this. and wrote eloquently about it, before he sold himself to those who he had spent the bloom of his intellect opposing. I was never interested in this subject until I started reading his various biographies to understand his thinking better in the late 1990's, and then went on to read his early works on the state and freedom. If he had been a more noble figure his fall might have been a tragedy. As it is, it just seems to be another dishonorable failure of stewardship and conscience.

This is what you have. Whether it works well or not is another matter and it seems a personal opinion heavily biased on where you sit at the playing table. But from a purely economic perspective if I were going to set up a mechanism to allow price fixing and fraud to occur, I could do little better, except perhaps to set up something more like an opaque monopoly such as the Federal Reserve with the ability to create supply out of nothing. The investors and producers are largely at the mercy of those who control the paper markets And this says nothing about the involvement of the central banks in influencing the price, which they admit that they do, if only obliquely.

Sure one can say. If you don't like the price you can keep taking delivery, except that you can't. The price is set on the Comex, which delivers paper dollars at will, and has a history of changing its rules at the drop of a hat to rescue trapped suppliers and speculative shorts. This is the sort of odd market that resolves itself in executive actions precipitated by breakdowns and default.

There is nothing here that could not be greatly improved by position limits and much greater transparency and accountability for counterparty risk. CFTC Commissioner Bart Chilton has shown himself to be remarkably insightful and courageous in promoted these changes to the US futures markets in the metals. Far from an efficient and vigorous market, as Adrian Douglas said at the CFTC hearing the US is merely a "sidehow" to the London market when it is open for trading at least with respect to actual product. But as amenable as this paper based market is to the 'easy skim' one might imagine there is a status quo that would fight any reform vociferously.

To use a poker analogy, I don't mind a 'no limits' game as long as it is table stakes where you put your 'stash' on the table for all to see, which again this is not, and the pot is split if you are raised beyond your bankroll, which this is also not. I would not imagine that a no limits game in which the big players are also often the dealers, and can see the cards that other cannot because of their seating, is the best sort of a mechanism with which to conduct price discovery for the average person in the market, who only wishes to play a few hands on a limited budget, or a small producer who wishes to bring their product to market.

As someone who approaches it as an amateur economist, and has been looking at its dynamics for the past few years, I may be missing something, but this seems less like an efficient market mechanism for price discovery and capital allocation, and more like a carney game.

Banks Come Back For Another Bailout in Ireland While the US 'Manages Perceptions'

The whole notion of bank bailouts is a tremendous injustice when not accompanied by personal bankruptcy and civil and criminal prosecution for those banks managers who created them and are found guilty of fraud.

In addition, the owners of the banks, whether through debt or shares, should be wiped out and the bank placed in a proper receivership while its books are sorted out.

The US is an accounting mirage. The notion that it will make money from its stake in Citi is a sleight of hand. The enormous subsidies to the banks both in terms of direct payments, indirect payments through entities like AIG, and subsidies such as the erosion of the currency and the deterioration of the real economy, will never be repaid.

The real model of how to handle a banking crisis is in the Scandinavian nationalization of the banks, or even better, the disposition of the Savings and Loans in the US. during that crisis.

This pragamatic approach, its cheaper just to pay them all off than to sort them out, is a child of the Rubinomics of mid 1990's in the States, in which it was determined to be better to prop up the stock markets, often by buying the SP futures, than it was to allow the market to reach its level, and then deal with the financial carnage of a market crash. Here is a review of a paper by Rubin's protege, and some might say the government's Thomas Cromwell, Larry Summers.

From the Horse's Mouth: Lawrence Summers On Market Manipulation In Times of Crisis

The fourth position, which Summers calls pragmatic, in his own words, “is the one embraced implicitly, if not explicitly by policymakers in most major economies. It holds that central banks must always do whatever is necessary to preserve the integrity of the financial system regardless of whether those who receive support are solvent or can safely pay a penalty rate. This position concedes that some institutions may become too large to fail. While lender-of-last-resort insurance, like any other type of insurance, will have moral hazard effects, I argue that these may be small when contrasted with the benefits of protecting the real economy from financial disturbances”

This is the very essence of the Rubin doctrine. Pragmatic circumvention of the Constitution and the laws of the land by means of market manipulation and government subsidies cloaked in secrecy, misrepresentation, and a public relations campaign.

In addition to this paper, Mr. Summers is also the author of a paper Gibson's Paradox which seems to prescribe the manipulation the price of key commodities including gold in order to influence longer term interest rates. Indeed, we hear that in some recent FOIA act returns there were refusals to disclose papers from the Fed purporting to set out the 'new gold policy of the US' with many charts and pages of text. Indeed, what is the real policy of the US? I thought it was to allow it to sit, unaudited, in Fort Knox and the various Reserve Banks, while leasing it out to some extent.

And while as Obama's current Economic Advisor is talking a good game, the facts seem to indicate that the US is still pursuing a policy of managed perceptions, accounting deceptions, and old fashioned insider dealing and other forms of corruption that always accompany government, but reach a feverish pitch in times of crisis. It is the establishment's form of looting.

As we can easily see, this policy has spawned a series of tremendous financial bubbles in tech, and housing, and now credit, and corporate debt, and the dollar itself, which will eventually veer completely out of control into the improbability of hyperinflation. Inflicting pain on the common taxpayers for the transfressions of the financiers is beyond moral hazard.

The Banks must be restrained, the financial system reformed, and the economy brought back into balance, before there can be any sustained recovery.

Guardian UK
Ireland Poised for New Bank Bailout
By Jill Treanor
29 March 2010 18.58 BST

Irish taxpayers face pouring billions more euros into their troubled banking sector on what is being dubbed "bailout Tuesday".

The government is expected to take bigger stakes in Allied Irish Banks and Bank of Ireland as the property lending spree that took place before the 2007 credit crunch continues to knock holes in their battered balance sheets.

But while the Irish taxpayer faces taking on a greater burden from the banking sector – perhaps as much as €16bn (£14bn) – the US began to prepare to sell off its 7.7bn shares in Citigroup, into which the authorities pumped $24bn of cash during the 2008 banking crisis. Those 7.7bn shares were worth $32bn last night - implying a profit for the US treasury if the share price can withstand the sale of such a huge amount of shares.

In Ireland, though, the crisis is yet to abate as the economy weakens and the government follows through on an austerity budget that has imposed cuts in public sector pay after €11bn was injected into the banks.

Shares in Allied Irish Banks closed down 19% in Dublin at €1.37, ahead of announcements when the National Asset Management Agency, a toxic loan body, is due to provide details on the price for taking on the bad loans. Financial regulators will also set out the size of the capital cushions the banks will have to hold in preparation for future losses.

The Irish government took control of Anglo Irish Bank last year and holds stakes of 16% in Bank of Ireland, which runs the Post Office bank in the UK, and 25% of Allied Irish.

Local speculation is focused on the government stake rising to more than 70% in Allied Irish and more than 40% in Bank of Ireland while building societies EBS and Irish Nationwide may also need taxpayer involvement as the authorities continue to tackle the losses caused by bad lending.

Fitch Downgrades Illinois and Warns of Further Actions as Budget Gap Widens

Illinois is financially the fifth largest US state with a 2008 GDP of approximately $633 Billion.

To put this in perspective, the 2008 GDP for the nation of Greece was approximately $357 Billion.

The largest state is California with $1.8 Trillion in 2008 GDP, roughly on a par with Russia, Spain, or Brazil,

The US is also considering accounting rule changes that will require the states to more accurately reflect and more fully fund their pension obligations for government employees.

The problem of States' debt is made more problematic by decreasing state tax revenues and the enormous demands of the US Federal government for more tax revenues on their citizens' incomes, and the crowding effect in markets by the record amounts of sovereign debt issuance which is largely short term and must be rolled over regularly.

The Bond Buyer
Fitch Downgrades Illinois to A-minus
By Yvette Shields
March 29, 2010

CHICAGO — Fitch Ratings late Monday downgraded Illinois’ general obligation rating one notch to A-minus and warned of possible further action by leaving the state’s credit on negative watch ahead of $1.3 billion of short- and long-term GO issuance in three deals over the coming weeks.

Gov. Pat Quinn had hoped that the General Assembly’s passage last week of pension reforms would stave off any negative rating actions and buy the state some additional time to address a nearly $13 billion budget deficit and liquidity crisis in the current legislative session.

But Fitch analysts said the state’s challenges are too severe and persistent. They believe it is unlikely the fiscal 2011 budget will “sufficiently address either the annual operating deficit or accumulated liabilities.”

The results of the current session will drive analysts’ decision as to whether Illinois holds on to its current rating level. Fitch dropped the state’s $23.4 billion of GO debt two notches down to its current level last July.

Fitch’s action follows Standard & Poor’s decision on Friday to place the state’s A-plus rating on negative CreditWatch. Moody’s Investors Service on Monday affirmed its A2 rating and negative outlook.

Bernanke Confronts the Kondratieff Winter at His Feast of Malinvestment

Here is some cultural diversion for a slow trading day.

Although this is not the best performance, it has subtitles in English which is a plus when trying to draw parallels for an audience unlikely to be fluent in Italian, or familiar with the libretto. This staging does not quite show it as vividly as some others I have seen, but at the end of the scene the ghost of the Commendatore drags Don Giovanni with him into hell. In this opera Leporello, the common man, escapes the fate of his master. In our analogy, I am afraid Don Bernanke may be dragging the common people along with him.

The SP is suspended in a tight range, with the big resistance at 1180 and support at 1155.

This is a holy week for Christians and Jews, and trading is light. The market is waiting for the Jobs Report on Friday, April 2. It would probably have been more appropriate to bring it on on April 1 (April Fool's Day).

I'm looking for a positive headline number of about 76,000, but it could be higher if they knock down the prior months in revision and move the jobs gains forward.

Discussion of market manipulation in the SP futures is becoming more open, with the noting of the propping in the SP futures becoming very pronounced. An exogenous shock could send the US equities markets into an air pocket. But those are tough odds to play.

The World Gold Council has finally acknowledged that China is becoming a big buyer of gold bullion, and this trend is likely to gain momentum. Despite their name, the WGC is the most timid and reserved of industry associations ever seen, often downplaying their own industry to a fault.

Memories of a Walk on the Appian Way, Some Years Ago

About 18 years ago during a trip to Rome with my wife, who was then pregnant with my son, I visited the room in which the English poet John Keats died of consumption, just off to the left of the Spanish Steps, looking down into the Piazza di Spagna. The year before I visited the house in Hampstead Heath at which he is said to have written, "Ode to a Nightingale."

Later that day we visited his gravesite in the Cimitero degli Inglesi, and read the inscription on his tombstone.

This Grave contains all that was mortal, of a Young English Poet, who on his Death Bed, in the Bitterness of his heart, at the Malicious Power of his enemies, desired these words to be Engraven on his Tomb Stone: Here lies One Whose Name was writ in Water.

I think we may afterwards have taken a bus, because I remember being vaguely scandalized at the disorder of the ticket process, which was apparently used only by tourists on their way to the catacombs. But at some point we reached the ancient wall of the city, and continued walking through the Porta San Sebastiano, south on the Via Applia in search of an old restaurant at which I desired to have our customary late lunch after a morning of rigorous walking. After a little while on the road we came to a small but very charming church, the Chiesa di Santa Maria in Palmis, but more commonly known as Chiesa del Domine Quo Vadis. I went inside, and to my surprise, this was the place referenced by Henryk Sienkiewicz in his famous book, Quo Vadis.

Old cities and places are full of a mixture of legend and history. I imagine that the story upon which the novel was based was one of those oral traditions that are handed down and embellished over time, not having been codified and fixed into a proper text, which as you may recall is how the Bible was brought together from a myriad of writings and authors.

I have to admit that it was a moving experience, to visit the places where these things are likely to have occurred in whatever particular way. The scoffers have a little less swagger since Heinrich Schliemann found the site of Troy from the text of Homer. It reminds us that Keats, and Peter, and Nero, and Petronius, and so many other figures remembered were real people, making decisions with confusion, worries, concerns, fears, and the rest of the issues that we all have today.

Here is the relevant section from Synkewicz's book.

"About dawn of the following day two dark figures were moving along the Appian Way toward the Campania.

One of them was Nazarius; the other the Apostle Peter, who was leaving Rome and his martyred co-religionists.

The sky in the east was assuming a light tinge of green, bordered gradually and more distinctly on the lower edge with saffron color. Silver-leafed trees, the white marble of villas, and the arches of aqueducts, stretching through the plain toward the city, were emerging from shade. The greenness of the sky was clearing gradually, and becoming permeated with gold. Then the east began to grow rosy and illuminate the Adban Hills, which seemed marvellously beautiful, lily-colored, as if formed of rays of light alone.

The light was reflected in trembling leaves of trees, in the dew-drops. The haze grew thinner, opening wider and wider views on the plain, on the houses dotting it, on the cemeteries, on the towns, and on groups of trees, among which stood white columns of temples.

The road was empty. The villagers who took vegetables to the city had not succeeded yet, evidently, in harnessing beasts to their vehicles. From the stone blocks with which the road was paved as far as the mountains, there came a low sound from the bark shoes on the feet of the two travellers.

Then the sun appeared over the line of hills; but at once a wonderful vision struck the Apostle's eyes. It seemed to him that the golden circle, instead of rising in the sky, moved down from the heights and was advancing on the road. Peter stopped, and asked, --

"See thou that brightness approaching us?"

"I see nothing," replied Nazarius.

But Peter shaded his eyes with his hand, and said after a while,

"Some figure is coming in the gleam of the sun." But not the slightest sound of steps reached their ears. It was perfectly still all around. Nazarius saw only that the trees were quivering in the distance, as if some one were shaking them, and the light was spreading more broadly over the plain. He looked with wonder at the Apostle.

"Rabbi. What ails thee?" cried he, with alarm.

The pilgrim's staff fell from Peter's hands to the earth; his eyes were looking forward, motionless; his mouth was open; on his face were depicted astonishment, delight, rapture.

Then he threw himself on his knees, his arms stretched forward; and this cry left his lips, --

"O Lord! O Lord!"

He fell with his face to the earth, as if kissing some one's feet.

The silence continued long; then were heard the words of the aged man, broken by sobs, --

"Quo vadis, Domine?" (Where are you going, Lord?)

Nazarius did not hear the answer; but to Peter's ears came a sad and sweet voice, which said, --

"If you desert my people, I am going to Rome to be crucified a second time."

The Apostle lay on the ground, his face in the dust, without motion or speech. It seemed to Nazarius that he had fainted or was dead; but he rose at last, seized the staff with trembling hands, and turned without a word toward the seven hills of the city.

The boy, seeing this, repeated as an echo, --

"Quo vadis, Domine?"

"To Rome," said the Apostle, in a low voice.

And he returned.

Paul, John, Linus, and all the faithful received him with amazement; and the alarm was the greater, since at daybreak, just after his departure, praetorians had surrounded Miriam's house and searched it for the Apostle. But to every question he answered only with delight and peace, --

"I have seen the Lord!"

And that same evening he went to the Ostian cemetery to teach and baptize those who wished to bathe in the water of life.

And thenceforward he went there daily, and after him went increasing numbers. It seemed that out of every tear of a martyr new confessors were born, and that every groan on the arena found an echo in thousands of breasts. Caesar was swimming in blood, Rome and the whole pagan world was mad. But those who had had enough of transgression and madness, those who were trampled upon, those whose lives were misery and oppression, all the weighed down, all the sad, all the unfortunate, came to hear the wonderful tidings of God, who out of love for men had given Himself to be crucified and redeem their sins.

When they found a God whom they could love, they had found that which the society of the time could not give any one, -- happiness and love..."

Quo Vadis, by Henryk Sienkiewicz, 1905

It is too bad that it is not read much today, because it is a really charming book. I think it has been made into several movie versions. I liked the one with Klaus Maria Brandauer, although the earlier epic with Robert Taylor and Deborah Kerr is more famous and probably more popular. The novel was a worldwide best seller in its day from about 1906 to 1930. I remember at the time I read it in 1968 enjoying it because of the portrayal of T. Petronius, Nero's Arbiter Elegantiae, who is said to have written the first western novel, The Satyricon. Such as I was, the budding classicist and natural scientist, a new modern man as my teacher and mentor would say.

The world turns to such things, but especially during times of suffering and trouble, when the great men and the masters rise up once again and proclaim their dominion. Perhaps it, or some things like it, will have a revival when the madness is once again unleashed, and The New Rome falls, and the New Temple is sacked.

And where is the Emperor Nero now, the lord of the world, but a memory, returned to the earth as the dirt and dust beneath some young child's fingernails, to be plucked out and discarded with a 'tut tut' by an observantly doting mother.

Whistleblower to CFTC in JPM Silver Manipulation Struck by Hit and Run Car In London

I am glad that although Mr. Maguire and his wife are shaken they will apparently be all right.

The related story on his allegations regarding manipulation in the silver market is here.

It appears they have 'the perp in hand' as the say. This should provide some light. I am prepared to accept this as an accident, of course, but it is one hell of a coincidence if so. It could also be the act of some trader who had a bit too much to drink, and a grudge to bear after the testimony the day before. Or something else altogether.

I hesitate to say anything more at this point, except curiouser and curiouser.

As reported by Adrian Douglas, the Director of GATA who has been the contact for Mr. Andrew T. Maguire, and on the GATA website

"On March 25th at the CFTC Public Hearing on Precious Metals GATA made a dramatic revelation of a whistleblower source, Andrew Maguire, who has first hand evidence of gold and silver market manipulation by JPMorganChase, and who had tipped off the CFTC in advance of manipulation in gold and silver some months ago.

On March 26th while out shopping with his wife in the London area, Mr. Maguire's car was hit by a car careening out of a side road. The driver of the vehicle then tried to escape.

When a pedestrian eye-witness attempted to block the driver's escape he accelerated at him and would have hit him had the pedestrian not jumped out of the way. The car then hit two other cars in escaping. The driver was apprehended by the police after police helicopters were used in a high speed chase.

Andrew and his wife were hospitalized with minor injuries. They were discharged from hospital today and should make a full recovery."

Guest Post: Grading Alan Greenspan

The Maestro and the Hundred Year Flood
By Keith Hazelton, The Anecdotal Economist

Alan Greenspan’s self-serving “The Crisis,” a 66-page white paper outlining exactly why no part of the extant global financial/liquidity/credit/solvency/deleveraging crisis was the fault of the Federal Reserve whose board he chaired for 18 year or anyone or any other entity for that matter, contains among the many exculpatory assertions, a fascinating, if not stupefying, revelation that, in setting capital adequacy levels, reserves and leverage limits, policymakers:

“…have chosen capital standards that by any stretch of the imagination cannot protect against all potential adverse loss outcomes. There is implicit in this exercise the admission that, in certain episodes, problems at commercial banks and other financial institutions, when their risk-management systems prove inadequate, will be handled by central banks. At the same time, society on the whole should require that we set this bar very high. Hundred year floods come only once every hundred years. Financial institutions should expect to look to the central bank only in extremely rare situations.” (p16-17, all emphasis added.).

No sir, Sir Alan. Hundred year floods come on average only once every hundred years, as any undergraduate who has completed Statistics 101 would recognize, presumably based on many centuries of flood observations in a particular locale.

Now we know if one flips a coin 100 million times, a tabulation of heads/tails results likely will yield a result infinitesimally close to 50/50, so that one may conclude, on average, the actual observation results would prove the statistical probability for each flip that the coin lands heads-up is 50 percent (we conveniently are excluding any possibility of the coin landing, say, balanced vertically on edge.)

We also can be confident in such a large observation, however, that low-probability strings of 10, 20 or 30 consecutive heads-up or tails-up results – while extremely unlikely in 100 flips – would, in fact, be commonplace.

That such occurrences have low probabilities, even extremely low probabilities in smaller observation samples, is immaterial. Regardless of the number of observations, even low probability events are bound to occur, and they are neither randomly nor evenly distributed.

Similarly, nature has no constraints as to the frequency of hundred-year floods, only that on average they should occur once every century, but if it pleases nature to generate 10 hundred-year floods in a century, and none for the next 900 years, albeit a low-probability event, such an observation is completely within the framework of reality.

Neither are there constraints, apparently, on the frequency of meltdowns in the complex, deregulated financial environment we have invented and unleashed upon ourselves, even though, unlike nature, we completely are in control of the frequency and regularity of hundred-year financial disasters.

Which is what is so self-serving about the former Fed chief’s term paper. By defaulting to a “stuff-happens-once-every-hundred-years-so-there’s-no-point-in-trying-to-prevent-it-since-the-negative-effects-of-prevention-would-outweigh-the-flood-cleanup-cost” defense, Sir Alan absolves himself, his fellow FOMC decision-makers and Fed economists, successive Congresses and Administrations, the banking and financial system, China, Japan, Germany and, yes, the American “consumer” from any culpability in the generation-long, debt-fueled party which has induced this hundred-year hangover.

It’s also what’s wrong with economics in general. Since macro-economic theories and policies cannot be experimentally verified – we can’t go back in time to see how different decisions in the past would have altered the present and future – Mr. Greenspan expects to get a pass when he essentially observes that removing the Fed’s easy-money punchbowl earlier in decades past, or perhaps merely serving smaller portions of credit-debt-leverage punch along with deregulation cookies, somehow would have created a worse outcome than the present mess, and he concludes his term paper with an untestable assertion:

"Could the breakdown that so devastated global financial markets have been prevented? Given inappropriately low financial intermediary capital (i.e. excessive leverage) and two decades of virtual unrelenting prosperity, low inflation, and low long-term interest rates, I very much doubt it. Those economic conditions are the necessary, and likely the sufficient, conditions for the emergence of an income-producing asset bubble. To be sure, central banks have the capacity to break the back of any prospective cash flow that supports bubbly asset prices, but almost surely at the cost of a severe contraction of economic output, with indeterminate consequences." (All emphasis added.)

Which is followed by a monstrous, ominous, “be-glad-we-only-have-a-mess-of-this-hundred-year-severity-to-clean-up” whopper:

"The downside of that tradeoff is open-ended."

Cue scary music. Of course the consequences are indeterminate, Sir Alan, and we never will know what our present and our children’s future would have been like had other, more prudent fiscal and monetary policies had been adopted by all participants, but in parsing Mr. G’s conclusion above, we find exactly where, and with whom, the fault resides:

• Excessive leverage of financial institutions? Congresses, Administrations, the Federal Reserve, FDIC, OCC and OTS, without question.


• Two decades of virtual unrelenting prosperity? Apparently is was virtual prosperity, not real prosperity, because it came at a price of excessive, unsustainable leverage among individuals, businesses and governments.


• Low Inflation? An obsession with consumption of low-cost goods imported from low-cost, overseas manufacturers, again fueled with leverage, instead of savings.


• Low long-term interest rates? Why Alan, you remember, it’s the Federal Reserve which sets interest rates, and you were its chairman for 18 years.

The fault then, it would seem, dear Alan, “lies not in our stars, but in ourselves,” and certainly not in the hundred-year flood, to badly paraphrase William Shakespeare’s Caesar.

And it would be amusing – this whole “it’s nobody’s fault, stuff happens” bit about hundred year floods coming only once every hundred years – if not for the physical, emotional and national wealth-destroying carnage of “The Crisis” of the last three years.

Not to mention the many years, if not decades, in our now less prosperous future which will be required to rebuild ourselves from the ground up after such an easily avoidable catastrophe, unlike nature’s hundred-year floods, of our own design.

OK, so it’s only the second draft of his term paper – maybe he’ll revise the final publication to attribute at least some culpability, but don’t count on it. Right now, I give it a "D+."

The Maestro and the Hundred-Year Flood

US Justice Department Names JP Morgan and UBS as Conspirators in US Muni Bond Fraud and Bid Rigging

The big American banks are starting to look more like criminal enterprises than a well managed financial system that is put forward as 'the envy of the world."

Just yesterday a whistle blower stepped forward and named J. P. Morgan in a price manipulation scheme in the metals markets that reaps millions in profits by cheating investors. The CFTC commissioners said in this same public meeting that the markets have never been more transparent and efficient, even as they had known of this allegation for months, and apparently failed to seriously investigate. And there was no mention of this in the mainstream media.

Until the public demands serious reform the cheating and the looting and malinvestment will continue, until the currency and bonds collapse like some Third World kelptocracy.

Time for a 'distraction?' Perhaps. But this will not solve the basic problem, that the world's largest economy is grinding lower, crushed by inefficiency and corruption. And the impact on the rest of the world may be quite serious because of the position of the Dollar as the world's reserve currency.

The Banks must be restrained, and the financial system reformed, and the economy brought back into balance, before there can be any sustained recovery.

Bloomberg
JPMorgan, Lehman, UBS Named in Bid-Rigging Conspiracy
By William Selway and Martin Z. Braun

March 26 (Bloomberg) -- JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case.

A government list of previously unidentified “co- conspirators” contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24.

The papers were filed by attorneys for a former employee of CDR Financial Products Inc., an advisory firm indicted in October. The attorneys, as part of their legal filing, identified the roster as being provided by the government. The document is labeled “list of co-conspirators.”

None of the firms or individuals named on the list has been charged with wrongdoing. The court records mark the first time these companies have been identified as co-conspirators. They provide the broadest look yet at alleged collusion in the $2.8 trillion municipal securities market that the government says delivered profits to Wall Street at taxpayers’ expense.

‘Sufficient Evidence’

“If the government is saying they are co-conspirators, the government believes they have sufficient evidence that they can show they were part of the conspiracy,” said Richard Donovan, a partner at New York-based law firm Kelley Drye & Warren LLP and co-chair of its antitrust practice. Donovan isn’t involved in the case.

The government’s case centers on investments known as guaranteed investment contracts that cities, states and school districts buy with the money they receive through municipal bond sales. Some $400 billion of municipal bonds are issued each year, and localities use the contracts to earn a return on some of the money until they need it for construction or other projects.

The Internal Revenue Service sometimes collects earnings on those investments and requires that they be awarded by competitive bidding to ensure that governments receive a fair return. The government charges that CDR ran sham auctions that allowed the banks to pay below-market interest rates to local governments.

CDR Fights Case

CDR, a Los Angeles-based local-government adviser, was indicted in October along with David Rubin, Zevi Wolmark and Evan Zarefsky, three current or former executives. The company and the three men have denied wrongdoing. Since last month, three former CDR employees who weren’t charged in the initial indictment have pleaded guilty and agreed to cooperate with the Justice Department.

More than a dozen financial firms are also facing civil suits filed by municipalities over the alleged conspiracy. Yesterday, U.S. District Judge Victor Marrero in Manhattan refused to toss out a lawsuit brought by Mississippi and other bond issuers....

‘Absolute Disaster’

Laura Sweeney, a Justice Department spokeswoman in Washington, declined to comment.

Banks may choose to cooperate with prosecutors because in light of the government bailout funds they’ve received “ a guilty plea would just be an absolute disaster for some of these companies,” said Nathan Muyskens, a partner at Shook, Hardy & Bacon in Washington and former trial attorney with the Federal Trade Commission’s Bureau of Competition.

“There have been antitrust investigations where there have been companies involved that were just never indicted,” he said in a phone interview.

At the same time, the government will probably focus on seeking to convict individual bankers, he said.

“When someone goes to jail for five years, that resonates,” he said. “When a company pays $200 million, it’s simply a balance sheet issue. Jail time is what captures corporate America’s attention...”

October Indictments

The indictments released in October didn’t identify any of the sellers of the investment contracts involved in the alleged conspiracy. They were identified only as Provider A and Provider B. They paid kickbacks to CDR after winning investment deals brokered by the firm, according to the indictments.

The firms did this by paying sham fees tied to financial transactions entered into with other companies, prosecutors said. Kickbacks were paid from 2001 to 2005, ranging from $4,500 to $475,000 each, according to the Justice Department.

According to the list contained in the court filing this week, the investment contracts involved were created by units of GE and divisions of Financial Security Assurance Holdings Ltd., a bond insurer formerly part of Brussels-based lender Dexia SA.

The kickbacks were paid out of fees generated by transactions entered into with two financial institutions that weren’t identified in the October court filing. The March 24 list filed by the defense named the two firms as UBS and Royal Bank of Canada..."

Read the rest of the story here.

S&P Market Indicator Downgrades US Sovereign Debt to aa+

I thought it was interesting that S&P market-derived indicator has downgraded the US sovereign debt to aa+, its lowest level in two years. Further, US credit default swaps are now showing more risk than the Eurozone.

But as the article goes on to say, the risk of a US default is improbable. Long before they reach that point they will pay off the debt through inflation, the monetization of debt. If you think that this is not possible, that they cannot do it, that 'inflation is impossible,' then you are sadly mistaken. They are already doing it, but are trying to limit its impact through aggressive perception management and a variety of accounting gimmicks. It is really remarkable to watch. People cling to what they wish to believe until it sweeps them over a precipice.

Still, there is a message in this market, and I think it is one of selective default, but also a coercion. Those who hold the debt of the US, and its Banks, will seek to rule it, even moreso than they do today.

This is nothing new. Previous generations have fought the same battle, and won. Freedom is not a place to visit, or a thing to be achieved. Freedom is a commitment, a way of life, that will endure only as long as men love it for themselves and their children, more than their weariness, or their fear, or vain comforts.

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the Bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst yourselves, and when you lost, you charged it to the Bank... Beyond question this great and powerful institution has been actively engaged in attempting to influence the elections of the public officers by means of its money...

You tell me that if I take the deposits from the Bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin. Should I let you go on, you will ruin fifty thousand families, and that would be my sin. You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, I will rout you out."

Andrew Jackson on The Second Bank of the United States which was the Central Bank of his day

I would say that there is less risk to the US sovereign debt than there is to the US Constitution.

Wall Street Journal
U.S. Is Riskier Than Euro Zone; So Says CDS Market
By MICHAEL CASEY
MARCH 24, 2010, 4:47 P.M. ET.

NEW YORK -- Something troubling has occurred in the market for default protection on the debt of the world's biggest borrower.

As the folks at Standard Poor's Valuation and Risk Strategies division noted in a research note Monday, the difference between the spread on U.S. sovereign credit default swaps and an equivalent benchmark for AAA-rated euro-zone sovereigns flipped into positive territory March 12. As U.S. CDS spreads expanded to their widest levels in two years, that cross-region gap blew out to 5.7 basis points last Friday before narrowing to 4.7 Tuesday.

Wider CDS spreads indicate that sellers of insurance against a particular issuer's default are charging more for it. In effect, the positive U.S.-versus-euro zone spread means investors think the risk of a U.S. default--however remote--is greater than that on euro-denominated sovereign debt.

So much for the view that low inflation and loose monetary policy make for a rosier debt outlook for Treasurys than for the debt of crisis-hit euro-zone sovereigns.

"We've seen CDS on U.S. Treasurys break with euro CDS before, but never to the degree we have here," said Michael Thompson, head of research for S&P's

Valuation and Risk Strategies group. "If we sit on this precipice for a time, I think a lot of market participants would see this as a bit of a shot across the bow, a bit of a wakeup" for anyone who's complacent about U.S. debt. "

Wouldn't it also challenge U.S. Treasurys' status as the so-called "risk free" benchmark? S&P didn't go there. But the report did say the trend "reflects increasing market anxiety surrounding the U.S.'s credit quality." In other words, a fiscal deficit worth 10% of gross domestic product--in the absence of a clear plan to reduce it -- matters.

My first instinct was to dismiss the trend as an anomaly fueled by the technical quirks of an illiquid sovereign CDS market, where a conflicting array of investment strategies can confuse price signals. Some market participants use CDS contracts to hedge existing positions in underlying bonds, others sell default insurance as an alternative exposure to those bonds, while still more seek to extract arbitrage profits from playing between the two.

What's more, the AAA euro-zone benchmark doesn't reflect bets on a single sovereign's debt but rather a basket of the region's six remaining AAA-rated countries: Germany, France, Austria, Finland, the Netherlands and Luxembourg.

Disentangling its message on default risk could be messy. And what, after all, can a current-day contract on a future Treasurys default tell U.S. when a U.S. breach on its financial obligations is virtually inconceivable? [The government would pay for its debt with inflation long before opting for the blunt instrument of default.]

Yet, notes Mr. Thompson, "there is real money changing hands there [in CDS markets]. And if there is real money changing hands, there has to be real value ... The market is expressing some valuable information."

Short-term moves of a basis point or two can be attributed to technical factors, but such a lasting shift in the two regions' CDS relationship "is not technical," Mr. Thompson said. "I certainly wouldn't ignore it."

Thompson's team also noted that the deterioration in U.S. default swaps meant that S&P's "market-derived signal" dropped to 'aa+,' its lowest level in two years. The historical series for that indicator is based on an established correlation with actual S&P ratings.

There's no indication that S&P's separate ratings division is about to downgrade the U.S. 's vital 'AAA' rating. But over time, ratings analysts cannot stay blind to market signals like this one. As its weighs the stimulus needs of a still-fragile U.S. economy against future risks to debt servicing costs, the U.S. government can't ignore market signals either.

Michael Casey, a special writer with Dow Jones Newswires, writes a regular column about currencies and fixed-income markets. Previously he was Newswires' Buenos Aires bureau chief and before that, assistant managing editor for the U.S. economy, Treasurys and foreign-exchange group in New York.

Whistleblower Speaks Out On J. P. Morgan's Market Manipulation - Reports Violations to the CFTC in the Silver Market

Do we have another Harry Markopolos here, describing in detail the manipulation of the silver markets by J.P. Morgan to the CFTC? How does this square with the testimony today from the CFTC Commissioners, who seem to indicate that the markets are functioning extremely well, and that investor can have full confidence in them?

I am led to understand that Mr. McGuire had offered to testify before the CFTC today, and that he was refused admittance. I do not know him, or the position he is in within the trading community. I cannot therefore assess his credibility or the validity of any evidence which he may present or possess. But I have the feeling that nothing will come of this.

Remember, there was no action on the Madoff scandal until AFTER his fraud collapsed, and the government was forced to acknowledge Markopolos' existence. He had been ignored and dismissed by the bureaucrats at the SEC for years because of Madoff's power and standing with the trading establishment. And of course by those who had an interest in hiding Madoff's scheme, if nothing else, to promote 'confidence' in the markets.

What seems particularly twisted about this is that JPM is the custodian of the largest silver ETF (SLV). Is anyone auditing that ETF, and watching any conflicts of interest and self-trading? Multiple counterparty claims on the same bullion?

If you ever wanted to see a good reason for the Volcker rule, this is it. These jokers are one of the US' largest banks, with trillions of dollars in unaudited derivatives exposure, and they seem to be engaging in trading practices like Enron did before it collapsed.

Have they lost their minds, or are they just that reckless, immature, short term, and arrogant? Morgan practically holds the keys to the US Treasury, a recent recipient of billions in taxpayer support, and still receiving signficant subsidies from the Fed. They seem to be in dire need of adult supervision. Blatantly and clumsily rigging the silver market, and then bragging about it to people outside their company. What's next, bumping off grannies for their Social Security checks? Three card monte games on the boardwalk?

I was trying to understand why this item struck me so hard this evening. It shocked me in a way that few things do anymore. I think it is because I had unconsciously come to the same conclusion earlier, on my own, in the post where I showed the repeated and obvious bear raids on gold into this option expiration, and it struck a resonant chord when I read McGuire's description of the silver manipulation. I refused to believe it, but apparently there it is. The "Dr. Evil" trading strategy that Citigroup was caught using in the Eurobond markets.

I do not expect the detailed facts on this to ever reach the light of day in my lifetime. The implications are far too political.

ADDITIONAL STATEMENT BY BILL MURPHY, CHAIRMAN OF THE GOLD ANTI-TRUST ACTION COMMITTEE

HEARINGS ON THE METALS MARKETS, MARCH 25, 2010

On March 23, 2010 GATA Director Adrian Douglas was contacted by a whistleblower by the name of Andrew Maguire. Mr. Maguire, formerly of Goldman Sachs, is a metals trader in London. He has been told first hand by traders working for JPMorganChase that JPMorganChase manipulates the precious metals markets and they bragged how they make money doing so.

In November 2009 he contacted the CFTC enforcement division to report this criminal activity. He described in detail the way in which JPM signals to the market its intention to take down the precious metals<. Traders recognize these signals and make money shorting the metals along side JPM. He explained how there are routine market manipulations at the time of option expiry, Non-farm payroll data releases, and Comex contract rollover as well as other ad hoc events.

On February 3 he gave two days advance warning by email to Mr Eliud Ramirez, a senior investigator of the Enforcement Division, that the precious metals would be attacked upon the release of the non-farm payroll data on February 5. Then on February 5 as it played out exactly as predicted further emails were sent to Mr. Ramirez in real time while the manipulation was in progress.

It would not be possible to predict such a market move in advance unless the market was manipulated.

In an email on that day Mr. Maguire said "It is 'common knowledge' here in London amongst the metals traders it is JPM's intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits. I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC allowing by your own definition an illegal concentrated and manipulative position to continue"

Expiry of the COMEX APRIL call options is today. There was large open interest in strikes from $1100 to $1150 in gold. As always happens month after month HSBC and JPM sell short in large quantities to overwhelm all bids and make unsuspecting option holders lose their money. As predicted in advance by GATA the manipulation started on March 19th when gold was trading at $1126. By last night it traded at $1085.

This is how much the gold cartel fears the enforcement division. They thumb their noses at you because in over a decade of complaints and 18 months of a silver market manipulation investigation nothing has been done to stop them. And this is why JPM’s cocky and arrogant traders in London are able to brag that they manipulate the market.

It is an outrage and we are making available the emails from our whistleblower, Andrew Maguire available to the Press wherein he warns in advance of a manipulative event.

Additionally Mr. Maguire informed us that he has taped recordings of his telephone communications with the CFTC for which we are taking the appropriate legal steps to acquire.

-END-

From: Andrew Maguire
Sent: Tuesday, January 26, 2010 12:51 PM
To: Ramirez, Eliud [CFTC]
Cc: Chilton, Bart [CFTC]
Subject: Silver today

Dear Mr. Ramirez:

I thought you might be interested in looking into the silver trading today. It was a good example of how a single seller, when they hold such a concentrated position in the very small silver market, can instigate a selloff at will.

(Note: This is the "Dr. Evil" trading strategy that got Citi rebuked and fined in the Euro Bond markets, and also got Enron into trouble in the energy markets. - Jesse)

These events trade to a regular pattern and we see orchestrated selling occur 100% of the time at options expiry, contract rollover, non-farm payrolls (no matter if the news is bullish or bearish), and in a lesser way at the daily silver fix. I have attached a small presentation to illustrate some of these events. I have included gold, as the same traders to a lesser extent hold a controlling position there too....

I brought to your attention during our meeting how we traders look for the "signals" they (JPMorgan) send just prior to a big move. I saw the first signals early in Asia in thin volume. As traders we profited from this information but that is not the point as I do not like to operate in a rigged market and what is in reality a crime in progress.

As an example, if you look at the trades just before the pit open today you will see around 1,500 contracts sell all at once where the bids were tiny by comparison in the fives and tens. This has the immediate effect of gaining $2,500 per contract on the short positions against the long holders, who lost that in moments and likely were stopped out. Perhaps look for yourselves into who was behind the trades at that time and note that within that 10-minute period 2,800 contracts hit all the bids to overcome them. This is hardly how a normal trader gets the best price when selling a commodity. Note silver instigated a rapid move lower in both precious metals.

This kind of trading can occur only when a market is being controlled by a single trading entity.

I have a lot of captured data illustrating just about every price takedown since JPMorgan took over the Bear Stearns short silver position.

I am sure you are in a better position to look into the exact details.

It is my wish just to bring more information to your attention to assist you in putting a stop to this criminal activity.

Kind regards,
Andrew Maguire

Read more on this, and some particular examples of silver market manipulation, here.

Market Concentration - Approximately 80% of the Precious Metal Derivatives
This is remniscent of the Oil and Steel Trusts from the turn of the 20th Century

Why Its Good to Own the Ratings Agencies (Or At Least to Have the Same Owner)

Dean Baker speaks to the issue of the US and its AAA rating.

I had considered that the Ratings Agencies might become instruments of national policy, implicated as they are in numerous scandals and misbehaviour. If you don't do the time, then you must have turned cooperative and informant in at least a soft and accommodating way.

But I had never considered this particular angle. Now there is room for doubt that they might serve the will of the US government, but there should be no doubt, given their recent history, that they are all too often willing to say and do whatever pleases Wall Street.

"....This means that if Moody’s were to downgrade the government’s debt, to be consistent it must also downgrade the debt of Citigroup, Goldman Sachs and the other big banks. If Moody’s downgrades the government’s debt, without downgrading the debt of the big banks – or even threatens to downgrade the government’s debt without also threatening to downgrade the debt of the big banks – then it is more likely acting in pursuit of Wall Street’s political agenda than presenting its best assessment of the creditworthiness of the U.S. government.

It is unfortunate that we have to suspect a major credit-rating agency of such dishonesty, but given its track record, serious people have no choice. To paraphrase an old Winston Churchill joke, we already know about the character of the bond-rating agencies, we are only asking if they are prostituting themselves now."

Dean Bakes, Will the US Lose Its AAA Rating?

The quotation that Dean Baker references from Churchill brings to mind this famous anecdote from another British wit:

George Bernard Shaw once found himself at a dinner party, seated beside an attractive woman. "Madam," he asked, "would you go to bed with me for fifty thousand pounds?"

The colossal sum gave the woman pause, and after reflection, she coyly replied: "Perhaps."

"And if I were to offer you five pounds?" Shaw asked.

"Mr. Shaw!" the woman exclaimed indignantly. "What do you take me for!"

"We have already established what you are," Shaw calmly replied. "Now we are merely haggling over price."

Today's CFTC Hearing on Metals Position Limits

Pretty much what you might expect. The gorillas hate restrictions, and threaten to take their business elsewhere if anyone tries to regulate them. Since there are only a few major metals exchanges in the world, TOCOM, LBMA, and COMEX, one might think the CFTC could pick up the phone and coordinate something with their counterparts without straining the smoothness of their golf swings.

For the most part commissioners say they are afraid of limiting transparency by increasing transparency requirements. As if there is sufficient market transparency today.

So let's not limit cheating, because it might lessen the volume of fraud on their exchanges and drive it to other countries. Let's see, like Japan, which has MORE transparency by company position, and London, which is mostly a physical market without futures as I recall. The FSA is cracking down on fraud. Maybe that will drive more business over here. Better tell them to ease up.

Perhaps the Commission is concerned that the financial pirates might try and take over Havana and turn it into their private casino. Oops, been there, tried that, too corrupt for their local standards. How about Somalia? They seem to be open to new free market trading concepts.

Gentlemen. Don't worry so much about other countries. Most of the recent financial frauds seem to be originating just to the east of the Hudson River and west of Long Island. Clean up your own house, and let the world look to its own devices.

For the most part as a regulator, the CFTC seems like the FED, but without the pocket protectors and PhD's, and the formal ownership by those whom it is supposed to be regulating.

Time for a change, America. I hate to sound negative, but if anything comes of this I will be astonished. The change will come after there is a major scandal, or a breakdown in the markets. And then the push will be to 'move on' and not look at what anyone did or did not do, but how we can 'fix it' by moving the regulatory responsibility to a committee of Chicago aldermen, or a contingent of Beverly Hills divorce lawyers. Are the Westies available for regulatory outsourcing? Hey, I know who can do it, after all, it's God's work.

What they said at CFTC hearing on metals limits

March 25 (Reuters) - The Commodity Futures Trading Commission held a hearing on Thursday to examine whether position limits are needed to curb speculation in metals futures markets.

Here are comments from participants:

GARY GENSLER, Chairman, CFTC

"Based upon what we learn, we will further review CFTC rules to determine what, if any, course of action is most appropriate." (Goldman Sachs alumni, and a Rubin protege.)

MICHAEL DUNN, Democrat commissioner, CFTC

"I am concerned that position limits in regulated futures markets without corresponding limits in the over-the-counter markets may result in less transparency in our markets, if those presently trading on exchanges move to over-the-counter and other opaque markets to circumvent CFTC regulations." (The benefit of course is that Joe Average doesn't trade on the unregulated and opaque markets, and won't be skinned on a weekly basis, or at least unless he or she is a qualified investor. Still, a decent thought.)

BART CHILTON, Democrat commissioner, CFTC

"The sensible, reasonable approach to position limits that guards against manipulation and stops excessive speculation is what we need to protect consumers.

I hope this hearing helps put us on a fast-track to getting a proposal out there." (A lone voice of reform. Bart is a man of the people.)

SCOTT O'MALIA, Republican commissioner, CFTC

"The exchanges registered with the commission are not the market's epicenter. Significant price discovery in these markets takes place abroad in London." (Let the FSA do it. Mentor is Mitch McConnell.)

"We must ensure that any rules or regulations do not offer any opportunities for regulatory arbitrage or decreased transparency of U.S. markets."

TOM LASALA, chief regulatory officer, CME Group (CME.O)

"The only impact that CFTC-imposed limits will have in the metals market will be to shift business away from U.S. exchanges to less-regulated or even wholly unregulated markets that are beyond the commission's jurisdictional reach." (Therefore one should never regulate because people will just move their business offshore. But that does beg the question of protecting AMERICAN investors and regulating THEIR markets. Very discouraging to hear this from the 'chief regulatory officer.')

DIARMUID O'HEGARTY, London Metal Exchange

"We've put a lot of work over the past 100 years to try and learn from the various mistakes in the market over the years and what we've ended up with is, I think, as good as it gets." (Got tungsten?)

JEFF BURGHARDT, Copper and Brass Fabricators Council

"It is our belief that investment funds have been the major driver behind the record high prices we have seen in many commodities in recent years, including copper."

"Increasing initial margin amounts charged to investment funds will be a more effective solution to the problem." (User Associations always want to limit the longs.)

TOM CALLAHAN, CEO of NYSE Liffe

"It is not clear that federally designed position limits for metals would have the desired effect of limiting unreasonable and abrupt price movements for these contracts just as federally set position limits for certain agricultural products did not appear to protect those products from price volatility during the recent commodity price bull run."

KEVIN NORRISH, Managing director commodities research, Barclays Capital

"Over the last 10 years, metals and energy have migrated to more transparent, better regulated markets. However, the wrong implementation could drive both the metals and energy markets back into that more opaque territory." (Always with the threats to get their way.)

JEREMY CHARLES, global head, HSBC's precious metals business

"Given the global nature of the precious metals markets, unilateral action on the part of the Commission could simply cause large market participants to shift business to other markets." (You can no longer regulate anything that takes place in your country because of globalization. Multinationals rule the world.)

JEFFREY CHRISTIAN, CPM Group

"My position is that the proposal is a mistake. Federally managed position limits seem both inappropriate and unnecessary." (perma-bear, par excellence)

RICHARD STRAIT, Triland USA, division of Mitsubishi

"In the misguided event position limits are mandated to the U.S. metals futures products, they should be applicable to the spot month only and not ... spread positions and only on an as-needed basis." (We reserve the right to manage the outer month prices.)

STEVE SHERROD, acting director of surveillance, CFTC

Citing an internal study of disaggregated commitment of traders data for COMEX, NYSE Liffe:

"In gold for all months combined and for a trader's net futures and delta-adjusted options combined position, 56 traders exceeded the position accountability levels on one or more days during the two-and-one-quarter-year sample period.

"The maximum number of traders holding positions in gold at or above the position accountability level on any one day was 26."

"Seventeen traders on average exceeded accountability levels for an average of 34 Tuesdays of the 115 Tuesdays in the sample period. The average position while over accountability levels was 20,233 contracts." (Ok we'll bite. What was the accountability level? What would happen if you set it higher to some percentage of the open interest? And what is special about a Tuesday? I'll gladly pay you Tuesday for some bullion today?)

MICHAEL MASTERS, Masters Capital Management

"Passive speculators are an invasive species that will continue to damage the markets until they are eradicated." (Who are these passive speculators, and why must we kill them? Are they getting in the way of the squid's beak?)

MARK EPSTEIN, individual trader

"If there weren't these big monster, guerrilla traders out there ... there would arrive a much more robust market-making community, the market will be much more effective in finding prices." (You say it brother.)

BILL MURPHY, Chairman, Gold Anti-Trust Action Committee

"The gold cartel ... thumb their noses at you because in over a period of complaints in 18 months of the (CFTC's) silver market manipulation investigation nothing has been done to stop them." (Well said, except I don't think those were their noses they were sticking out at them. No noses could be that small and that ugly.)

(Reporting by Christopher Doering, Frank Tank, Tom Doggett; Editing by Roberta Rampton; Editing by Marguerita Choy and Jim Marshall)

This brings to mind the famous quote from Meister Eckhart, "The price of inaction is far greater than the cost of making a mistake.”

But it is a sad reality of modern management that you are never blamed for doing nothing, and too often richly rewarded, but you are never allowed to make a mistake.

When I was in corporate life, the 'big boss' told me "If you do ninety-nine things exceptionally right, but one thing wrong, we will only remember the one thing that you did wrong."

And then he had the nerve to ask the next week in a meeting, "How can we get our employees to take more risks?"

This is the point where Obama must again begin to lead, to change the culture in Washington. The regulatory process needs the stimulus of words of direction, the proper motivational incentives, and perhaps, backed occasionally by a size 11 shoe.

NY Fed Commercial Mortgage Backed Securities Pass Fail List

Here are the CMBS that the NY FED Accepted or Rejected today, by CUSIP.

One needs a pricey subscription service or handy access to a Bloomberg terminal to look them up to determine who owns or at least authored what.

Here is a list of the owners of the CUSIP's. Obviously I cannot guarantee its accuracy. But since you are paying for this Treasury subsidy operation, I thought you might like to have at least some indication of who the recipients are.

SP Daily Chart - Backing Off Resistance at the Breakout But Still Above Support

The quiet backstory is that the Five and Seven Year Treasury Auctions did not go all that well, with Zimbabwe Ben and his Primary Dealer Pranksters scarfing up a good share of the auctions, with a chunk even going to their London subsidiaries so it would not be completely awkward.

The headline action is centered on the Dow Industrials, with the psychological 11,000 number tantalizingly close. The Industrials are the bright, shiny spinner designed to loosen the pockets of mom and pop, to lure them out of their bonds and cash, and into overpriced equities.

One really has to question whether there can be any serious market decline while Timmy is considering selling the Treasuries stake in Citi. One might even wonder if this entire ropeline rally from 1045 is not in support of a major plop of something not very palatable into the public domain.

ORCL after the bell.

On the news front, according to Zerohedge the London FSA is beginning an investigation into the front-running of block trades

We do not know if the SEC is on board with this yet. Perhaps someone can post the FSA's notice of investigation on PornHub. Maybe the US ought to consider outsourcing their Financial Consumer Protection Agency to London. It makes more sense to have it there than with the Fed.

NY Precious Metals Prices Pressured into Futures Options Expiration

As gold and silver trading in the states moves into another futures option expiration and the rollover from the April contract with first delivery notice time approaching, the paper gold market deviates once again from the world market for bullion.

As John Brimelow notes:

Intriguingly, so also may be China. Mitsui-HK today explicitly says:
“While euro tried to pull the yellow metal lower, Chinese buying wanted to push it higher”

More concretely, the Shanghai market closed at a $6.08 premium to world gold of $1,091.98, the second day of unusually high premiums. At the equivalent of 8,469 NY lots, volume actually exceeded TOCOM for the first time I can remember. Andy Smith of Bache suggested the other day that China might resort to buying gold to groom its foreign trade statistics, which he pointed out was done by Japan in the 80s and Taiwan in the 90s. Official action would not show in Shanghai, of course, but maybe the hive mind is at work.

Local Vietnam gold stood at a $27.89 premium to world gold of $1,087.20 early today (Wednesday $24.41/$1,104.20).

While on day session volume equivalent to 7,804 NY contracts TOCOM open interest slipped 2.9 tonnes (900 NY), the public added 3.67 tonnes (6.8%) to their long. The active contract added 15 yen and world gold rose $1.25 during the session to go out $3 above NY’s depressed Wednesday 4PM level.

Gold in Euros rallied fairly smoothly from the end of yesterdays’ NY aftermarket until the European open, then moved approximately sideways until 10AM NY. $US gold did the same, but more erratically. At its intraday high around 7-30 AM it was up $6.80. A raid seems now to be underway. Estimated volume at 9AM is reported to be an eye-popping 206,132 lots which if not an error will need some explaining; the CME website indicates volume at 10 AM was roughly 87,000 of which about half was done before the floor session.

With the option expiry still pending price resistance in NY is to be expected, which will greatly please the now clearly activated Eastern physical buyers.

Do you think they were banging the price lower with heavy short selling in the early hours to depress the price below the key strike prices around 1090 and more importantly, 1100? When there are no limits on positions and you have deep pockets in a fairly thin market, the opportunities for manipulating price action becomes a rather compelling temptation, especially if you think the Fed 'has your back' and expect to be bailed out by them or the Exchanges if you are ever cornered for delivery of what you have already sold.

While traders can make money just following the momentum of the big trading desks on this obvious price pattern, it does not foster confidence to see the markets so obviously pushed around, and for the regulators to be so obviously asleep at their desks (or surfing porn, as the recent investigations of the SEC have disclosed).

This is not to say that there are no government officials and regulators trying to do the right thing for the public which they serve and the oaths which they have taken. Elizabeth Warren, Chair of the TARP Oversight Program, and Bart Chilton, a CFTC Commissioner, and a Bush nominee no less, who are providing outstanding leadership on the subject of market reforms. It is would be good to see them receive more visible support from this Administration, to encourage the many in government who would be more than wiling to act, given the appropriate encouragement and leadership.

Gold April Futures Hourly Chart



Gold June Futures Hourly Chart



Gold Weekly Chart



Silver Weekly Chart



Mining Index

Gold in US Dollars Correlated to US Sovereign Debt

The fundamentals supporting the long term trend.

Brown's Bottom: A Bailout of the Multinational Bullion Banks Involving the NY Fed

The bottom referred to, of course, is the bottom of the gold price, and the sale of approximately 400 tonnes of the UK's gold at the bottom of the market.

The sticky issue is not so much the actual sale itself, but the method under which the sale was taken and who benefited. 

There has been widespread speculation that the manner in which the sale was conducted and announced was in support of the nascent euro, which Brown favored. This does not seem to hold together however.

There is also a credible speculation that the sale was designed to benefit a few of the London based bullion banks which were heavily short the precious metals, and were looking for a push down in price and a boost in supply to cover their positions and avoid a default. The unlikely names mentioned were AIG, which was trading heavily in precious metals, and the House of Rothschild. The terms of the bailout was that once their positions were covered, they were to leave the LBMA, the largest physical bullion market in the world.

"LONDON, June 1, 2004 (Reuters) -- AIG International Ltd., part of American International Group Inc., will no longer be a London Bullion Market Association (LBMA) market maker in gold and silver, the LBMA said on Tuesday."

LONDON, April 14, 2004 (Reuters) — NM Rothschild & Sons Ltd., the London-based unit of investment bank Rothschild, will withdraw from trading commodities, including gold, in London as it reviews its operations, it said on Wednesday.

The manner in which the sale was conducted, and the speed at which it was undertaken, without consultation of the Bank of England, made many of the City of London's financiers a bit uneasy. The sale as bailout was given impetus by this revelation which surfaced some years later.

"In front of 3 witnesses, Bank of England Governor Eddie George spoke to Nicholas J. Morrell (CEO of Lonmin Plc) after the Washington Agreement gold price explosion in Sept/Oct 1999. Mr. George said "We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.
Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K."

So it appears that long before AIG crafted its enormous positions in CDS with the likes of Goldman Sachs, requiring a bailout by young Tim and the NY Fed, it may have been engaging in short positions in the metals markets, especially silver, and may have required a bailout by England to preserve the integrity of the LBMA.

There are also some who think that the gold sale provided a front-running opportunity for that most rapaciously well-connected of Wall Street Banks, Goldman Sachs. Gold, Goldman, and Gordon

This is the undercurrent of the inquiries in England today, and the controversy surrounding Brown's Bottom. There is thought that the information disclosed on the London sales will be heavily redacted to protect the involvement of the US Federal Reserve bank, which is said to have engaged in gold swaps to further depress the price, in conjunction with a major producer and a NY based money center bank. The people of the UK deserve answers.
.

UK Telegraph
Explain why you sold Britain's gold, Gordon Brown told
By Holly Watt and Robert Winnett11:55AM GMT 24 Mar 2010

Gordon Brown has been ordered to release information before the general election about his controversial decision to sell Britain's gold reserves.

The decision to sell the gold – taken by Mr Brown when he was Chancellor – is regarded as one of the Treasury's worst financial mistakes and has cost taxpayers almost £7 billion.

Mr Brown and the Treasury have repeatedly refused to disclose information about the gold sale amid allegations that warnings were ignored.

Following a series of freedom of information requests from The Daily Telegraph over the past four years, the Information Commissioner has ordered the Treasury to release some details. The Treasury must publish the information demanded within 35 calendar days – by the end of April.

The sale is expected to be become a major election issue, casting light on Mr Brown's decisions while at the Treasury.

Last night, George Osborne, the shadow chancellor, demanded that the information was published immediately. "Gordon Brown's decision to sell off our gold reserves at the bottom of the market cost the British taxpayer billions of pounds," he said. "It was one of the worst economic judgements ever made by a chancellor.

"The British public have a right to know what happened and why so much of their money was lost. The documents should be published immediately."

Between 1999 and 2002, Mr Brown ordered the sale of almost 400 tons of the gold reserves when the price was at a 20-year low. Since then, the price has more than quadrupled, meaning the decision cost taxpayers an estimated £7 billion, according to Mike Warburton of the accountants Grant Thornton.

It is understood that Mr Brown pushed ahead with the sale despite serious misgivings at the Bank of England. It is not thought that senior Bank experts were even consulted about the decision, which was driven through by a small group of senior Treasury aides close to Mr Brown.

The Treasury has been officially censured by the Information Commissioner over its attempts to block the release of information about the gold sales.

The Information Commissioner's decision itself is set to become the subject of criticism. The commissioner has taken four years to rule on the release of the documents, despite intense political and public interest in the sales. Officials have missed a series of their own deadlines to order the information's release, which will now prevent a proper parliamentary analysis of the disclosures.

It can also be disclosed that the commissioner has held a series of private meetings with the Treasury and has agreed for much of the paperwork to remain hidden from the public. The Treasury was allowed to review the decision notice when it was in draft form – and may have been permitted to make numerous changes.

In the official notice, the Information Commissioner makes it clear that only a "limited" release of information has been ordered.

Ed Balls, who is now the Schools Secretary, Ed Miliband, now the Climate Change Secretary, and Baroness Vadera, another former minister, were all close aides to the chancellor during the relevant period.

If the information is not released by the end of April, the Treasury will be in "contempt of court" and will face legal action. A spokesman said last night that the Treasury was not preparing to appeal against the ruling.

How auctions cost taxpayer £7bn

The price of gold has quadrupled since Gordon Brown sold more than half of Britain’s reserves.

The Treasury pre-announced its plans to sell 395 tons of the 715 tons held by the Bank of England, which caused prices to fall.

The bullion was sold in 17 auctions between 1999 and 2002, with dealers paying between $256 and $296 an ounce. Since then, the price has increased rapidly. Yesterday, it stood at $1,100 an ounce.

The taxpayer lost an estimated £7 billion, twice the amount lost when Britain left the Exchange Rate Mechanism in 1992.

The proceeds from the sales were invested in dollars, euros and yen. In recent years, most other countries have begun buying gold again in large quantities.

SP Daily Chart: The Financial Engineering of Bubble-nomics

The SP is reaching a high note here. It is an attempt, in my judgement, to pump up financial assets, led by price manipulation and not any economic fundamentals or legitimate price discovery. It might go higher, but higher from here it looks like bubble territory, if we are not there already.

Overdue for a fairly stiff correction, but do not get in front of it for the sake of your portfolio. I would not underestimate the Fed's willingness to create a new bubble to attempt to counteract the effects of the last two. What else can they do given the hole into which they have dug themselves? It will take a serious financial reform and economic restructuring effort to correct this. Until then the looting continues.

Interest Rate Swap Spreads on Treasuries Turn Negative for the First Time

Does this imply that the comparable LIBOR is lower than US Treasuries? If so, yikes (I think).

Purely technical, the result of govenment mandates for insurance companies and pension funds to match duration obligations, and some slightly more exotic hedging from the denizens of the trading desks?

Some also speculate that this is one or two primary dealers leveraging their interest rate derivatives. And that they are anticipating some fresh antics from Zimbabwe Ben.

I am fresh out of speculation on this, so if anyone has a cogent insight on this, I would not mind hearing it. You know how to reach me by email.

It does looks like the mispricing of risk. And as we all know, that can leave a mark. It might not be so bad if this is just a temporary thing, but I get the sense that the government's sworn commitment to subsidizing moral hazard is poking the market's animal spirits in the ass, and the risk trade is back on.

This seems to be a recurrent trend here in the Hogfather's School of Economic Mischief and Misery.

And in the meantime, Watch the Bond Market, not Bank Lending or Velocity.

Bloomberg
Ten-Year Swap Spread Turns Negative on Renewed Demand for Risk
By Susanne Walker
March 23, 2010 12:45 EDT

March 23 (Bloomberg) -- The 10-year U.S. swap spread turned negative for the first time on record amid rising demand for higher-yielding assets such as corporate and emerging market securities.

The gap between the rate to exchange floating- for fixed- interest payments and comparable maturity Treasury yields for 10 years, known as the swap spread, narrowed to as low as negative 0.44 basis point, the lowest since at least 1988, when Bloomberg began collecting the data. The spread narrowed 3.38 basis points to negative 0.38 basis point at 12:40 p.m. in New York.

A negative swap spread means the Treasury yield is higher than the swap rate, which typically is greater given the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate, or Libor. The 30-year swap spread turned negative for the first time in August 2008, after the collapse of Lehman Brothers Holdings Inc. triggered a surge of hedging in swaps. The difference narrowed to negative 18.56 basis points today.

“It’s hedge-related activity related to new corporate issuance,” said Christian Cooper, an interest-rate strategist at Royal Bank of Canada in New York, one of 18 primary dealers that trade with the Federal Reserve. “As more and more institutions receive, then swap rates will go lower.”

Interest Rate Hedging

Debt issued by financial firms is typically swapped from fixed-rate back into floating-rate payments, triggering receiving in swaps, which causes swap spreads to narrow. An increase in demand to pay fixed rates and receive floating forces swap spreads wider, provided Treasury yields are stable. Corporations that issue bonds also use the swaps market to hedge against changes in interest rates that may result in increased debt service costs.

The extra yield investors demand to own corporate bonds rather than government debt was unchanged yesterday at 154 basis points, or 1.54 percentage points, the narrowest since November 2007, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. High-yield debt returned a record 57.5 percent in 2009, and another 4.3 percent this year, according to the Bank of America index data.

“There’s a lot of money on the sidelines waiting for mortgage-backeds to cheapen up,” said Cooper. “In the absence of them getting cheaper and as the end of the buyback program comes near, people are looking for high quality spread products, so a good place to park is in swap spreads.”