Guest Post: The Perils of Credit Money Systems Managed by Private Corporations

In this instance the 'paper money' system would be analagous to money created by private banks by means of expanding credit. The Second Bank of the United States is the predecessor to the Federal Reserve Bank System which was established in 1913.

"The paper system being founded on public confidence and having of itself no intrinsic value, is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain.

The corporations which create the paper money cannot be relied upon to keep the circulating medium uniform in amount. In times of prosperity, when confidence is high, they are tempted by the prospect of gain or by the influence of those who hope to profit by it to extend their issues of paper beyond the bounds of discretion and the reasonable demands of business.

And when these issues have been pushed on from day to day until the public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given; suddenly curtail their issues; and produce an unexpected and ruinous contraction of the circulating medium which is felt by the whole community.

The banks, by this means, save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people. We have already seen its effects in the wild spirit of speculation in the public lands and various kinds of stock which, within the last year or two, seized upon such a multitude of our citizens and threatened to pervade all classes of society and to withdraw their attention from the sober pursuits of honest industry. It is not by encouraging this spirit that we shall best preserve public virtue and promote the true interests of our country.

But if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor; it will multiply the number of dependents on bank accommodations and bank favors; the temptation to obtain money at any sacrifice will become stronger and stronger, and inevitably lead to corruption which will find its way into your public councils and destroy, at no distant day, the purity of your government. Some of the evils which arise from this system of paper press, with peculiar hardship, upon the class of society least able to bear it...

Recent events have proved that the paper money system of this country may be used as an engine to undermine your free institutions; and that those who desire to engross all power in the hands of the few and to govern by corruption or force are aware of its power and prepared to employ it. Your banks now furnish your only circulating medium, and money is plenty or scarce according to the quantity of notes issued by them. While they have capitals not greatly disproportioned to each other, they are competitors in business, and no one of them can exercise dominion over the rest. And although, in the present state of the currency, these banks may and do operate injuriously upon the habits of business, the pecuniary concerns, and the moral tone of society, yet, from their number and dispersed situation, they cannot combine for the purpose of political influence; and whatever may be the dispositions of some of them their power of mischief must necessarily be confined to a narrow space and felt only in their immediate neighborhoods.

But when the charter of the Bank of the United States was obtained from Congress, it perfected the schemes of the paper system and gave its advocates the position they have struggled to obtain from the commencement of the federal government down to the present hour. The immense capital and peculiar privileges bestowed upon it enabled it to exercise despotic sway over the other banks in every part of the country. From its superior strength it could seriously injure, if not destroy, the business of any one of them which might incur its resentment; and it openly claimed for itself the power of regulating the currency throughout the United States. In other words, it asserted (and it undoubtedly possessed) the power to make money plenty or scarce, at its pleasure, at any time, and in any quarter of the Union, by controlling the issues of other banks and permitting an expansion or compelling a general contraction of the circulating medium according to its own will.

The other banking institutions were sensible of its strength, and they soon generally became its obedient instruments, ready at all times to execute its mandates; and with the banks necessarily went, also, that numerous class of persons in our commercial cities who depend altogether on bank credits for their solvency and means of business; and who are, therefore, obliged for their own safety to propitiate the favor of the money power by distinguished zeal and devotion in its service.

The result of the ill-advised legislation which established this great monopoly was to concentrate the whole money power of the Union, with its boundless means of corruption and its numerous dependents, under the direction and command of one acknowledged head; thus organizing this particular interest as one body and securing to it unity and concert of action throughout the United States and enabling it to bring forward, upon any occasion, its entire and undivided strength to support or defeat any measure of the government. In the hands of this formidable power, thus perfectly organized, was also placed unlimited dominion over the amount of the circulating medium, giving it the power to regulate the value of property and the fruits of labor in every quarter of the Union and to bestow prosperity or bring ruin upon any city or section of the country as might best comport with its own interest or policy.

We are not left to conjecture how the moneyed power, thus organized and with such a weapon in its hands, would be likely to use it. The distress and alarm which pervaded and agitated the whole country when the Bank of the United States waged war upon the people in order to compel them to submit to its demands cannot yet be forgotten. The ruthless and unsparing temper with which whole cities and communities were oppressed, individuals impoverished and ruined, and a scene of cheerful prosperity suddenly changed into one of gloom and despondency ought to be indelibly impressed on the memory of the people of the United States.

If such was its power in a time of peace, what would it not have been in a season of war with an enemy at your doors? No nation but the freemen of the United States could have come out victorious from such a contest; yet, if you had not conquered, the government would have passed from the hands of the many to the hands of the few; and this organized money power, from its secret conclave, would have directed the choice of your highest officers and compelled you to make peace or war as best suited their own wishes. The forms of your government might, for a time, have remained; but its living spirit would have departed from it.

The distress and sufferings inflicted on the people by the Bank are some of the fruits of that system of policy which is continually striving to enlarge the authority of the federal government beyond the limits fixed by the Constitution. The powers enumerated in that instrument do not confer on Congress the right to establish such a corporation as the Bank of the United States; and the evil consequences which followed may warn us of the danger of departing from the true rule of construction and of permitting temporary circumstances or the hope of better promoting the public welfare to influence, in any degree, our decisions upon the extent of the authority of the general government. Let us abide by the Constitution as it is written or amend it in the constitutional mode if it is found defective.

The severe lessons of experience will, I doubt not, be sufficient to prevent Congress from again chartering such a monopoly, even if the Constitution did not present an insuperable objection to it. But you must remember, my fellow citizens, that eternal vigilance by the people is the price of liberty; and that you must pay the price if you wish to secure the blessing. It behooves you, therefore, to be watchful in your states as well as in the federal government.

The power which the moneyed interest can exercise, when concentrated under a single head, and with our present system of currency, was sufficiently demonstrated in the struggle made by the Bank of the United States. Defeated in the general government, the same class of intriguers and politicians will now resort to the states and endeavor to obtain there the same organization which they failed to perpetuate in the Union; and with specious and deceitful plans of public advantages and state interests and state pride they will endeavor to establish, in the different states, one moneyed institution with overgrown capital and exclusive privileges sufficient to enable it to control the operations of the other banks.

Such an institution will be pregnant with the same evils produced by the Bank of the United States, although its sphere of action is more confined; and in the state in which it is chartered the money power will be able to embody its whole strength and to move together with undivided force to accomplish any object it may wish to attain. You have already had abundant evidence of its power to inflict injury upon the agricultural, mechanical, and laboring classes of society, and over whose engagements in trade or speculation render them dependent on bank facilities, the dominion of the state monopoly will be absolute, and their obedience unlimited. With such a bank and a paper currency, the money power would, in a few years, govern the state and control its measures; and if a sufficient number of states can be induced to create such establishments, the time will soon come when it will again take the field against the United States and succeed in perfecting and perpetuating its organization by a charter from Congress.

It is one of the serious evils of our present system of banking that it enables one class of society, and that by no means a numerous one, by its control over the currency to act injuriously upon the interests of all the others and to exercise more than its just proportion of influence in political affairs. The agricultural, the mechanical, and the laboring classes have little or no share in the direction of the great moneyed corporations; and from their habits and the nature of their pursuits, they are incapable of forming extensive combinations to act together with united force. Such concert of action may sometimes be produced in a single city or in a small district of country by means of personal communications with each other; but they have no regular or active correspondence with those who are engaged in similar pursuits in distant places. They have but little patronage to give the press and exercise but a small share of influence over it; they have no crowd of dependents about them who hope to grow rich without labor by their countenance and favor and who are, therefore, always ready to exercise their wishes.

The planter, the farmer, the mechanic, and the laborer all know that their success depends upon their own industry and economy and that they must not expect to become suddenly rich by the fruits of their toil. Yet these classes of society form the great body of the people of the United States; they are the bone and sinew of the country; men who love liberty and desire nothing but equal rights and equal laws and who, moreover, hold the great mass of our national wealth, although it is distributed in moderate amounts among the millions of freemen who possess it. But, with overwhelming numbers and wealth on their side, they are in constant danger of losing their fair influence in the government, and with difficulty maintain their just rights against the incessant efforts daily made to encroach upon them.

The mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control; from the multitude of corporations with exclusive privileges which they have succeeded in obtaining in the different states and which are employed altogether for their benefit; and unless you become more watchful in your states and check this spirit of monopoly and thirst for exclusive privileges, you will, in the end, find that the most important powers of government have been given or bartered away, and the control over your dearest interests has passed into the hands of these corporations.

The paper money system and its natural associates, monopoly and exclusive privileges, have already struck their roots deep in the soil; and it will require all your efforts to check its further growth and to eradicate the evil. The men who profit by the abuses and desire to perpetuate them will continue to besiege the halls of legislation in the general government as well as in the states and will seek, by every artifice, to mislead and deceive the public servants. It is to yourselves that you must look for safety and the means of guarding and perpetuating your free institutions. In your hands is rightfully placed the sovereignty of the country and to you everyone placed in authority is ultimately responsible. It is always in your power to see that the wishes of the people are carried into faithful execution, and their will, when once made known, must sooner or later be obeyed. And while the people remain, as I trust they ever will, uncorrupted and incorruptible and continue watchful and jealous of their rights, the government is safe, and the cause of freedom will continue to triumph over all its enemies.

But it will require steady and persevering exertions on your part to rid yourselves of the iniquities and mischiefs of the paper system and to check the spirit of monopoly and other abuses which have sprung up with it and of which it is the main support. So many interests are united to resist all reform on this subject that you must not hope the conflict will be a short one nor success easy. My humble efforts have not been spared during my administration of the government to restore the constitutional currency of gold and silver; and something, I trust, has been done toward the accomplishment of this most desirable object. But enough yet remains to require all your energy and perseverance. The power, however, is in your hands, and the remedy must and will be applied if you determine upon it."

Andrew Jackson, Farewell Address, March 4, 1837

NY Fed Cited in Cover-Up By SIGTARP's Barofsky - Possible Criminal Charges

It's never the crime, it's always the cover up.

This is beyond a doubt the story of the week. Neil Barofsky has been a thorn in the side of the Treasury Department and the Fed since he first took office.

I doubt there will be criminal charges filed against Turbo Tim personally, since in his case the clueless CEO defense may obtain some traction. Unless, that is, they have wiretaps and/or emails showing collusion with some of the bailed out banks, in either insider trading or the manipulation of assets for extraordinary gains.

It is a boiling scandal, and emblematic of the hidden corruption that has pervaded financial regulation in Washington for the past ten years at least. It did not start with Obama, but it may still bring down key members of his Administration.

Reform the financial system, audit the Fed.

Bloomberg
Barofsky Says Criminal Charges Possible in Alleged AIG Coverup
By Richard Teitelbaum
28 April 2010

April 28 (Bloomberg) -- ...That tense relationship [between Treasury and Barofsky] has grown out of Barofsky’s mandate to monitor and root out fraud and waste in the management of TARP, the $700 billion program passed in October 2008 to remove toxic debt from the banks. The special inspector general, in a series of reports, interviews and congressional hearings, has heaped criticism on the Treasury Department’s operation of the program.

Barofsky’s most recent broadside came on April 20, when a SIGTARP report labeled a housing-loan modification program funded with $50 billion of TARP money as ineffectual.

...The TARP watchdog has also criticized Treasury Secretary Timothy F. Geithner in reports and in congressional testimony for his handling of the process by which insurance giant American International Group Inc. was saved from insolvency in 2008, when Geithner was head of the Federal Reserve Bank of New York.

The secrecy that enveloped the deal was unwarranted, Barofsky says, adding that his probe of an alleged New York Fed coverup in the AIG case could result in criminal or civil charges.

In Senate Finance Committee testimony on April 20, Barofsky said SIGTARP would investigate seven AIG-linked mortgage-related securities similar to Abacus 2007-AC1, the instrument underwritten by Goldman Sachs Group Inc. that is at the center of a U.S. Securities and Exchange Commission lawsuit filed against the investment
bank on April 16.

...Barofsky and Geithner’s offices have gone toe-to-toe over AIG, alleged lax oversight of TARP funds and even over the question of whom Barofsky reports to.

Barofsky, a former federal prosecutor who was once the target of a kidnapping plot by Colombian drug traffickers, says he’s also looking into possible insider trading connected to TARP. He says his agency would want to know if bankers bought stock in their companies before it was made public that their institutions would get TARP
money, for example.

“There was a time when, if you got that word the stock price would go up, and if you were to trade on that information prior to the public announcement, that would be classic insider trading,” Barofsky says.

A Democrat named by a Republican president, Barofsky says missteps by both the George W. Bush and Barack Obama administrations are to blame for TARP’s failures.

“There’s a reason there are Tea Partiers out there, and when you look at it, anger at the bailout is one of the first things they talk about,” says Barofsky, referring to the anti- Obama political movement. “This Treasury Department and the previous Treasury Department bear some of the responsibility for not being straightforward with the American people.”

Barofsky criticized Geithner’s predecessor, Paulson, in an October 2009 report, saying Paulson publicly described the initial nine TARP bank recipients as healthy when he knew that at least one of them risked failure.

...SIGTARP has more than 40 agents, including former Secret Service, Federal Bureau of Investigation and Internal Revenue Service investigators, who sport blue windbreakers emblazoned with the SIGTARP seal.

They are authorized by Congress to carry guns -- Barofsky does not --make arrests, and subpoena and seize records.

In its late-January report, SIGTARP said that the banks rescued by TARP remained “too big to fail.” They still have an incentive to make risky wagers in order to generate the profits that will reward their executives, the report says.

“The definition of insanity is repeating the same actions over and over again and expecting a different result,” Barofsky says. “If the goal of TARP was to make sure we don’t have another financial collapse, well, obviously it’s made the likelihood of that much, much greater.”

....In a December report, Barofsky showed how insurance giants Hartford Financial Services Group Inc. and Lincoln National Corp. bought tiny thrifts -- one with just $7 million in assets -- to qualify for the TARP Capital Protection Program, which is designed to encourage bank lending. Hartford and Lincoln used the more than $4.3 billion in TARP funds they received almost entirely to finance insurance operations,
according to the report.

“Treasury didn’t have to approve that,” Barofsky says.

Allison wrote SIGTARP that buying troubled assets from insurance companies was part of TARP.

Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., says Barofsky hasn’t been aggressive enough. She says SIGTARP should be running criminal probes of the bankers who underwrote and managed the collateralized debt obligations that were at the center of the financial meltdown.

CDOs are bundles of mortgage-backed bonds and other debt sold to investors. Tavakoli says the CDO managers sometimes replaced relatively high-quality securities with new ones that were more likely to default.

“It is securities fraud if you take securities and package them and knowingly pass them off with phony labels,” she says.

Barofsky says investigations related to the underwriting and sale of CDOs are ongoing.

...Barofsky says he’s battling an entrenched culture of secrecy in the Treasury and elsewhere.

“One of the important lessons that I hope will be learned from this entire financial crisis is that the reflexive reaction against transparency, that disclosure will bring
terrible things, has not been proven true,” he says.

He offers the AIG bailout as an example. For more than a year, the New York Fed kept key aspects of the AIG bailout secret, including details of its own involvement and its decision to have AIG pay the insurer’s bank counterparties 100 cents on the dollar on the credit protection they’d bought against about $62 billion in CDOs.

In a November report, SIGTARP criticized Geithner’s failed efforts to obtain discounts from the banks.

After the banks had been
paid in late 2008, a lawyer from the New York Fed sought to have AIG keep the banks’ identities under wraps, as well as data about the CDOs that would have revealed which firms had underwritten the toxic bonds and which ones had managed them.

“There’s a lot of things about AIG that were not disclosed, based on the assumption that the sky would fall,” Barofsky says. “Transparency does a lot more good than bad.”

Barofsky says the question of whether the New York Fed engaged in a coverup will result in some sort of action.

“We’re either going to have criminal or civil charges against
individuals or we’re going to have a report,” Barofsky says. “This is too
important for us not to share our findings.”

He won’t say whether the investigation is targeting Geithner personally.

In a statement, the New York Fed said: “Allegations that the New York Fed engaged in a coverup of its intervention in AIG are not true. The New York Fed has fully cooperated with the Special Inspector General.”

Currency Wars: Markets Shudder on Downgrade of Spain

There was unusually heavy put buying yesterday in NY markets on the Spanish stock index ETF.

Lzst month a group of US hedge funds were investigated for collusion in planning short selling assaults on the euro. Having exhausted the developing world, which has largely tossed them out, have the economic hitmen finally turned on the developing world as we forecast in 2005 that they would?

This is not to say that Greece, Portugal, or Spain are without problems or fault. There is a general crisis in many of the developed country fiat currencies, including the United States. The rising price of gold and silver, despite the heavy handed manipulation by a few of the banking centers, is a sure sign of a flight from paper controlled by central banks.

The US financial interests have been shown to exercise a disconcerting amount of control over the three US-based Ratings Agencies. I wonder how long it will be before any of the US states will have their credit ratings downgraded, and how those attacks might be structured. I am sure the government would then act to curtail their naked shorting and market manipulation activity.

As the NY based stock tout crowed on Bloomberg this morning, "The US can inflate its way out of this crisis much more easily than can any other country." Well, it is an advantage to own the printing press, and to control key elements of the global financial system.

And it makes one wonder how long the economic predators will be given free rein by the co-opted regulatory agencies and government in the US, which cannot even pass a motion to debate financial reform to the floor of its Senate. I would suggest that the debate, even when it moves forward, will not produce anything sufficient to promote a sustainable recovery. That is why this debate must move now to the floors of Parliaments and legislative bodies in the rest of the world. And there has to be much more openness compelled from their central banks with regard to private dealings with the US Federal Reserve. It is now a matter of national priority.

Wall Street Journal
Euro Drops To New One-Year Low On Spain Downgrade
By Bradley Davis
April 28, 2010

NEW YORK (Dow Jones)--The euro dropped to a new one-year low Wednesday as a ratings agency downgrade of Spain sent a rush of fear through markets that a sovereign debt crisis was spreading across the euro-zone periphery.

The euro dropped to $1.3129, its lowest level since April 2009, on Standard & Poor's downgrade of Spain's long-term debt, which was accompanied by a negative outlook. The downgrade follows S&P's slicing of the ratings of Greece and Portugal Tuesday, which sent the euro plummeting.

"The deep-seated nature [of the euro-zone sovereign debt crisis] is only now being realized by the markets," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, N.J, "and we're looking at a potential funding crisis" of government and corporate debt in the euro-zone periphery "in the not too distant future."

Other ratings agencies are likely to follow with additional downgrades, analysts said, which will send the euro even lower...

US Equity Markets Feel an Unfamiliar Twinge of Fear

There was a bit of a spike in the Volatility Index to go with an increase in volume today as the markets recoiled from their familiar complacency, urged in part by the deterioration of the debt ratings of Greece and Portugal. This sent markets reeling and gold flying.



The rally from the bottom has had a 61.8% retracement, which makes traders nervy. This is the point where the stock index must show its hand, and either keep moving higher and strike its bullish brand, or flounder in what may have been a protracted bounce from a deeply oversold bottom. It does not necessarily collapse from here, as a prolonged sideways consolidation is always an option. The Banks' trading algorithms love a sideways chop that skin both bulls and bears.

Watch the VIX and the volume.



Technical Indicators have not yet flashed a firm sell signal.



It will take at least another big down day with heavy volume to start the indicators rolling over.



When will the markets break for us, up or down,

S’io credesse che mia risposta fosse
A persona che mai tornasse al mondo,
Questa fiamma staria senza piu scosse.
Ma perciocche giammai di questo fondo
Non torno vivo alcun, s’i’odo il vero,
Senza tema d’infamia ti rispondo.

Or until human voices wake us, and we drown?

Ο ανήφορος φέρνει κατήφορο

Let us go then, you and I...

Control Frauds HyperInflate and Extend Bubbles Maximizing Damage - A Control Fraud at Work in the Silver Market Short Positions?

Here is a working paper by William K. Black about 'control frauds' and how they relate to the most recent credit crisis in the United States, a breakdown of stewardship that has placed the rest of the world's financial sector at risk as well.

Control frauds are by their very nature conspiratorial in that they involve the suborning of regulators, ratings agencies, exchanges, the media, and legislators to ignore and facilitate misrepresentation that enable white collar crime. They are difficult to prosecute because by their nature they involve twisting the legal into the extra-legal on a broad basis to achieve a particular financial effect, while limiting many specific aspects to the letter of the law, or at least the gray areas.

By and large they operate in the shadows, hiding behind secrecy and a general mindset towards short term greed and lapses in ethics. Investigations following the Crash of 1929 and the S&L crisis demonstrated that the existence of such pervasive lapses in stewardship do exist.

Personally I think the significant short positions in the silver market may be a form of control fraud. This is why so much effort and care is being taken by some individuals and groups to discover the extent and nature and holders of the short positions that are dominant. And this is why the participants are so vociferous and secretive regarding their activities.

To those who say that the commodity markets are too large, and too well regulated for this sort of thing to occur, this is the sort of fraud that Enron used to manipulate the energy markets, to the extent that they were able to cause significant social and commercial disruption to the state of California.

More on this another time. For now understanding how these frauds work is enough to study in instruments such as home mortgages. And most people do not need to understand this. But here is a good point for the average person to keep in mind.

Light is a good disinfectant. Fraud cannot bear exposure. While some confidentiality must be maintained in trading, obsessive secrecy regarding significantly large positions and collateral matters is often an indication that something is not right, that it is hidden from the market participants view for a particular reason that is deleterious to market pricing and efficiency.

The only way to settle this is by more transparency and disclosure. Rhetoric and supposition is often mere noise meant to distract from and promote the fraud if in fact it does exists. And if it does not, disclosure will reveal this as well.

Epidemics of 'Control Fraud' Lead to Recurrent, Intensifying Bubbles and Crises
William K. Black
University of Missouri at Kansas City - School of Law
April 15, 2010

Abstract:

“Control frauds” are seemingly legitimate entities controlled by persons that use them as a fraud “weapon.” A single control fraud can cause greater losses than all other forms of property crime combined.

This article addresses the role of control fraud in financial crises. Financial control frauds’ primary weapon is accounting. Fraudulent lenders produce exceptional short-term “profits” through a four-part strategy: extreme growth (Ponzi), lending to uncreditworthy borrowers, extreme leverage, and minimal loss reserves.

These exceptional “profits” defeat regulatory restrictions and turn private market discipline perverse. The profits also allow the CEO to convert firm assets for personal benefit through seemingly normal compensation mechanisms. The short-term profits cause stock options to appreciate. Fraudulent CEOs following this strategy are guaranteed extraordinary income while minimizing risks of detection and prosecution.

The optimization strategy causes catastrophic losses. The “profits” allow the fraud to grow rapidly by making bad loans for years. The “profits” allow the managers to loot the firm through exceptional compensation, which increases losses.

The accounting control fraud optimization strategy hyper-inflates and extends the life of financial bubbles. The finance sector is most criminogenic because of the absence of effective regulation and the ability to invest in assets that lack readily verifiable values. Unless regulators deal effectively with the initial frauds their record profits will produce imitators. Control frauds can be a combination of “opportunistic” and “reactive”. If entry is easy, opportunistic control fraud is optimized. If the finance sector is suffering from distress, reactive control fraud is optimized. Both conditions can exist at the same time, as in the savings and loan (S&L) debacle.

When many firms follow the same optimization strategy a financial bubble hyper-inflates. This further optimizes accounting control fraud because the frauds can hide losses by refinancing. Mega bubbles produce financial crises.

Download the complete working paper here.

Market Manipulation, Systemic Risk and Fraud, Pure and Simple, And It Continues Today

This article by the Financial Times should remove any doubt in anyone's mind that Goldman Sachs was willfully selling fraudulent financial instruments. It appears that they were working in conjunction with Ratings Agencies, Mortgage Origination Firms, and Hedge Funds to cheat investors.

"Cheat" means to circumvent or distort the normal price discovery process through misrepresentation, price manipulation, and omissions and distortion of key data.

Carl Levin summarized the situation in his opening statement this morning in tying together various Congressional hearings and investigations into aspects of the recent financial crisis and the underlying frauds. It sounds remarkably like the frauds that Enron had so recently inflicted on the American public.

In particular, Congressman Levin gave a good description of the key role that derivatives played in this control fraud.

"Of special concern was Goldman’s marketing of what are known as “synthetic” financial instruments. Ordinarily, the financial risk in a market, and hence the risk to the economy at large, is limited because the assets traded are finite. There are only so many houses, mortgages, shares of stock, bushels of corn or barrels of oil in which to invest.

But a synthetic instrument has no real assets. It is simply a bet on the performance of the assets it references. That means the number of synthetic instruments is limitless, and so is the risk they present to the economy. Synthetic structures referencing high-risk mortgages garnered hefty fees for Goldman Sachs and other investment banks. They assumed an ever-larger share of the financial markets, and contributed greatly to the severity of the crisis by magnifying the amount of risk in the system.

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

This is also a good description of the basis of the emerging scandal in the silver market, and other commodity markets such as those that Enron manipulated, in which synthetic bets are being used to manipulate price, and improbable sales are being misrepresented under the cover of secrecy and opaque markets as actual sales, when in fact they are merely derivative bets in which the seller may be manipulating the price and taking the other side of the sale above and beyond their actual delivery of the goods. When is Gary Gensler, the Goldman Sachs alumnus chairing the CFTC these days, finally going to institute some significant reforms in the US commodity futures exchanges?

The further question one might ask is, "When is the Administration going to put the FBI and the Justice Department to work in the more serious criminal investigation of the perpetrators of this fraud, with an eye to prosecutions under the RICO statutes?"

A lack of effective regulatory response and reform to the Enron and Worldcom scandals, facilitated by the inappropriate if not pandering monetary and regulatory policies of the privately owned Federal Reserve Bank, allowed the even larger housing bubble to form, bringing the US financial system, and indeed the global economy, to the brink of calamity.

This failure on the part of the US to rein in its financial sector jeopardizes all of us, because of the position of their banks in deals around the world, but in particular because of the place of the US dollar as the world's reserve currency.

President Obama does not need the Republicans to begin serious investigation by his branch of government. Indeed, this is why he was elected, and the promises that he had made to voters.

The existing financial reform legislation being debated in the Congress is unlikely to be strong enough to prevent the next Enron-like fraud, and indeed, is unlikely to even shut down the existing frauds in the commodity markets, recently disclosed by whistle-blowers.

We suspect the Administration and the Congress are putting forward a good show for the public, even while continuing to take millions of dollars in contributions from the industry, and the very firms that are under investigation like Goldman Sachs. Firms that have been and are continuing to receive government subsidies including but not restricted to TARP funds and FDIC subsidies, while they continue to lobby against financial reform and presumably their own investigations.

This is a reform government? Don't make us laugh.

Reform is best when it is driven by a desire to see oaths and promises upheld, and justice done. It is at its worst when it is just a political deal to 'get something done' to silence the voices of critics.

As an aside, in my estimation the reporting on Bloomberg financial television is hitting new lows each day. They are so willfully unbalanced and misleading in their reporting that it beggars the mind. It is a disgraceful sham to call it journalism.

Financial Times
Goldman ‘criticised $1bn loan product’
By Henny Sender, Francesco Guerrera, Stephanie Kirchgaessner
April 27 2010 00:52

Goldman Sachs officials privately disparaged a complex $1bn mortgage security that the Wall Street bank sold to investors, according to e-mails released by Senate investigators on the eve of hearings on Tuesday on the bank’s role in the financial crisis.

The disclosure of the e-mails by the Senate subcommittee on investigations, which is conducting the hearing, opens up a new front in Goldman’s battle to defend itself against accusations that it put its interests ahead of its clients.

The Securities and Exchange Commission earlier this month alleged that Goldman fraudulently failed to disclose that a hedge fund influenced the composition of a complex mortgage-related security, called Abacus, underwritten by the bank.

The Goldman communications released on Monday involve Timberwolf, another so-called collateralised debt obligation, or CDO, which was structured by the bank to give investors a chance to bet on subprime mortgages.

Tom Montag, then a senior Goldman executive and now head of corporate and investment banking at Bank of America, was quoted as describing the deal in an e-mail as follows: “Boy that timeberwof (sic) was one shi**y (sic) deal,” according to the Senate subcommittee.

The subcommittee said that Matthew Bieber, the Goldman trader responsible for managing the deal, later described the day that the Timberwolf security was issued as “a day that will live in infamy”, recalling the language President Franklin Roosevelt used for the Japanese attack against Pearl Harbor.

Lawyers for Basis Yield Alpha Fund, a hedge fund that was forced to liquidate after its $100m investment in Timberwolf plummeted in value, have been holding talks with Goldman about the deal, according to a person familiar with the matter.

Goldman officials declined to comment on the matter. Mr Montag also declined to comment.

Within five months of issuance, Timberwolf lost 80 per cent of its value. The security was liquidated in 2008. Among the biggest buyers of Timberwolf was a hedge fund under Bear Stearns Asset Management, which held $300m of the $1bn deal, before the Bear fund collapsed, according to the Senate material.

SP Futures Daily Chart

The Federal Reserve and the Administration seem intent on creating another bubble, or rather reflating an old one in US dollar heavy financial assets, in order to prolong the mother of all bubbles, the credit in US dollars bubble.

They are doing it selectively, with the banks carefully apportioning the excess liquidity into financial assets held by a relatively fewer amount of Americans who own stocks, while savers are heavily penalized.

When the credit bubble begins to totter things will become quite chaotic, and the panic this next time around may be terrific, dwarfing that so-easily forgotten repentance and regret of 2007-8. More than panic: hysteria.

I think it is now too late for a real reform. The Democrats have squandered their mandate from the people, and the Republicans are crony capitalists marching in lock step with the Banks, who seem to be in control once again. But I could be mistaken, and would be glad if I am.

When the US dollar and economy roll over it will make quite a wave that will swamp many boats. But these things take time. Once they start to happen, it moves slowly at first, but then gains a momentum and becomes almost unstoppable.

I am not quite sure how much water the USS Leviathan has already taken on, and how big the hole might be. But I firmly believe that the iceberg has been struck, the damage done, and the process has begun. The lifeboats are being quietly provisioned and reservations taken for the officers and crew, and the upper decks.

Again, these things take time, and there is always hope until the end. But there is less and less that can be done as the process continues to unfold, with no serious repairs, and only distractions for the passengers, and encouragingly false announcements, from the bridge.



Don't feed the sharks. Wait for this to break support and trend.

The Financial Crisis: Are We All Responsible?

"Whoever commits a fraud is guilty not only of the particular injury to him who he deceives, but of the diminution of that confidence which constitutes not only the ease, but the very existence of a society." Samuel Johnson

As the hearings and scandals progress, and the revelations and charges start to cut closer to the heart of the credit swindles, inevitably there will be a movement to say, "We are all responsible. Let's allow bygones to be bygones, it was all a misunderstanding. Let's move on to something new. Justice is not important, and cannot be done."

There will be long accountings of how the problems arose, and how changes in the banking laws, broker deregulation, and the erosion of elite privileges compelled the Wall Street banks to take more and greater risks, to violate unspoken understandings about customer relationships, to take great risks, to bend the laws, to use money and influence to suborn perjury and the breaking of oaths, and to generally undermine the fabric of government.

There will be long analyses that suggest that trust has been lost, the trust that binds the social and financial interactions of people. And there will be an effort to regain that trust, to promise change and reform, and of course, justice.

As for justice they will say, but aren't we all responsible? Didn't we all believe the promise that 'greed is good?'

No.

The overwhelming majority of people are hard working, honest in their dealings, more concerned with raising families than ruling others, if anything distracted by their day to day problems. Long suffering, patient to a fault, too willing to the give the Wall Street bankers the benefit of the doubt for the very reason of their own good natures. They could not imagine themselves doing the things of which these men stand accused, so they cannot believe that others would so willingly lie and deceive, cheat and steal, attack the very heart of the nation, while wrapping themselves in a flag of hypocrisy, for a few more dollars that they can hardly need or even personally spend.

And why? Because it feeds their sickened hearts, their pathological egos, and the need to make others suffer loss for their own gains. It sets them apart from a humanity which they hold in contempt enmingled with a nagging self-hate, makes them feel superior and worthwhile, and at the extreme even as gods among men.

So when the fresh public relations spin and propaganda from Wall Street and the financial sector's demimonde starts this week, and seeks to confuse the issues and distort the true nature of the fraud, recall who profited and who lost, who was caught with their hands deep in the pockets of the many, and even now stand arrogantly unrepentant with the ongoing misery of others to their account. And who stood idly by while charged by sworn oaths with protecting the innocent, the unsuspecting many, from the predatory, lawless few.

"When bad men combine, the good must associate; else they will fall one by one, an unpitied sacrifice in a contemptible struggle." Edmund Burke

Or, in the words of William K. Black and Elliot Spitzer in their essay Questions on the Goldman Scandal at New Deal 2.0:

"We applaud the SEC lawsuit, but it will not solve the problem. Unless our financial system is reformed to put adequate protections and checks and balances in place, we can expect this kind of fraud to continue. Financial executives will continue to take risks they do not understand. Those who control the flow of capital will continue to churn out profits with socially disastrous consequences."

The banks must be restrained, the financial system reformed, the economy brought bank into balance, and justice done though the mighty fall, before there can be any sustained recovery.

Regulations Alone Are Never Enough, But Here's How They Can Easily Be Made Pointless

Mr. Obama's speech at the Cooper Union today was remarkably unsatisfying. It seemed to be given from weakness, and almost obsequious as the American President politely asked his largest campaign contributors to please stop flouting the law, defrauding the people and their customers, and spending millions per day lobbying the Congress to buy changes in the reform legislation to provide them with the 'right regulators' of their choice and convenient loopholes to render it ineffective.

The reform making its way through the Congress is unlikely to be effective given the process in place, despite the political kabuki dance being conducted by the Congress and the Banks.

The solution is to put simple and effective regulations in the hand of stronger, independent, ad highly capable regulators to bear on the financial services industry, and to understand that the regulations must evolve with a dynamicly evolving business. The idea that you can erect some impregnable and unchanging Maginot line against bank fraud is laughable, a farce.

As William K. Black disclosed in his testimony the other day, the regulators always had the power to shut down the frauds, and to resolve the financial crisis without having to give away billions. They lacked the will, and the motivation.

You want to wipe that smirk off Lloyd Blankfein's face? Nominate Eliot Spitzer or Elizabeth Warren to be the head of the SEC, or the CFTC, and provide them with a adequate budget and a staff of financial experts and a few experienced prosectors.

Even with strong regulations, unless you have capable and motivated regulators, there are always ways to evade the rules, especially if they are complex and provide exceptions. The simpler they are, the stronger the regulations will be, provided they are flexible enough to be amended and expanded efficiently to match the changing and dynamic nature of the industry that they are overseeing.

This is not that difficult, and these jokers are not that smart, although part of their con is to paint themselves as the smartest, the best, and practically unstoppable.

The root of the US financial crisis is always and everywhere regulatory capture, political cronyism, and fraud. It really is that simple.

Barack Obama should to listen to a speech by Nick Clegg of the UK Liberal Democratic Party to hear what a genuine reformer sounds like. Today he sounded like a servant, but not for the public.

Marketwatch
Meet the New Goldman Sachs Derivatives Business
By David Callaway
April 22, 2010

"...So the version making its way to the Senate floor Wednesday included a host of exemptions for non-bank companies who use derivatives to hedge against quick movements in prices for resources they need. These include airlines, manufacturers, other trading corporations, and pension funds - entities like Enron, for example, or the Orange County, Ca., retirement fund - two infamous financial wizards.

So firms like Goldman, Morgan Stanley, or J.P. Morgan Chase Co. would be able to register as other entities - airlines, manufacturers, pension consultants -- and continue to trade derivatives to their hearts content.

Sounds silly, until you realize that's just what Goldman and a number of other banks did almost two decades ago to enable them to trade widely in commodities index futures. In 1981, Goldman got itself classified as a "hedger," such as a farmer or food producer, so it could trade commodities without fear of limits put on pure speculators.

Part of the fallout from that was the disastrous run-up in food and commodities prices we saw in 2009, caused by speculators, which finally forced the Commodities Futures Trading Commission to take a look at these special exemptions. See story on Goldman futures trading exemptions.

This is where the battle over the derivatives bill lies in the next several days, and where Wall Street will concentrate its efforts. The more exemptions granted; the larger the loopholes and trading opportunities. These are not stupid people, by the way.

Another provision would require the $60 trillion foreign exchange swaps industry to be overseen by the CFTC, which is the same regulator that earlier this week was considering whether traders could make markets in Hollywood movie futures, but neither of those ideas will fly - especially in foreign currency markets.

To make its derivatives regulation work, and have teeth, Congress and the Obama Administration must resist all exemptions on derivatives trading. They must instead focus on forging a global alliance in the G-20 this weekend in Washington to stand behind the creation of a transparent market in derivatives trading through clearing houses and exchanges.

Doing this would lead to cheaper trading for customers and make it easier for global regulators to supervise the creation of new products. Importantly, it would also allow the big banks to continue to participate in what is in fact a very lucrative and vital business for the global economy, not just to hedgers, but to those seeking loans to rebuild their companies, industries, or countries. Like it or not, banks are the primary lenders and they need to be allowed to do business.

Whether this in fact will happen in Washington, or whether Congress will once again descend into a chaos of partisan bickering and blind and reactionary rule making, is anybody's guess. Goldman is almost certainly betting on both outcomes.

Unadjusted Producer Price Index

One picture is worth 1000 words.

World of Wall Street - Unadjusted Year Over Year: Producer Price Index Up 6.1%

William K. Black's Testimony to the Congress on Lehman's fraud

The recent US financial crisis is always and everywhere founded in regulatory capture, dissembling, influence peddling, and fraud.

'Third Party' Liberal Democrats Jump Into Contention in British Polls

British elections became a 'three way' race as Liberal Democrat Nick Clegg electrified audiences in the recent televised debate.

UK Election

"Many will have learned more about the three main parties' policies in 90 minutes than they had ever known before. In an election in which trust and integrity are likely to prove crucial all will have had the chance to contrast close up and under fire the personal mettle of Messrs. Cameron, Clegg and Brown."

This speaks volumes about what is likely to become a trend and perhaps a preview of the US November elections in which incumbents drop and give way to a more independent and third party candidates.

Liberal Democrat leader Nick Clegg speaks in a recent press conference about banking reform and the Goldman Sachs scandal in the States.



I am informed by a UK reader that this poll understates the push the Liberal Democrats have made, and that in other polls they trail the Tories by only two points, or are at par.

US Said to Ready Special Armed Forces Unit For Domestic Deployment in Case of Disaster or Civil Unrest

Although the National Guard has been used in the past to deal with protests, they were called by the state governors and were not acting at the direction of the Federal government.

"The Posse Comitatus Act is a United States federal law (18 U.S.C. § 1385) passed on June 18, 1878, after the end of Reconstruction, with the intention (in concert with the Insurrection Act of 1807) of substantially limiting the powers of the federal government to use the military for law enforcement. The Act prohibits most members of the federal uniformed services (today the Army, Navy, Air Force, and State National Guard forces when such are called into federal service) from exercising nominally state law enforcement, police, or peace officer powers that maintain "law and order" on non-federal property (states and their counties and municipal divisions) within the United States.

The statute generally prohibits federal military personnel and units of the National Guard under federal authority from acting in a law enforcement capacity within the United States, except where expressly authorized by the Constitution or Congress. The Coast Guard is exempt from the Act during peacetime."

I wonder if this is true, and if the Obama Administration intends to deploy Federal troops, or declare martial law, this summer prior to the elections. I am not familiar with the Newark Examiner.

It does not seem consistent with the law, because this is a regular army regiment. The provisions for their deployment passed during the Bush Administration had been repealed, setting the use of troops back to the conditions of Insurrection as I recall.

I believe that is the premise by which the government directed MacArthur to lead regular army troops to dispel the WWI veterans from the Capitol in the last Great Depression.

Even in the race riots of the 1960's which were in many cases armed and dangerous, the National Guard was deployed at the direction of the state's governor. I am not aware of any other legal precedents or rules on this. Perhaps someone else can oblige.

P.S. A reader informs me that this news report is from a 'conservative' news source that has a variety of virtual locations in different states. The size of this military unit is also said to be greatly overestimated at 80,000. I suspect that this might be the case, and that the purpose of this news piece may be to incite misplaced concerns. But it does serve to bring up the issue, and to make people aware that posse commitatus has been considered a 'liberty' of the land for over a hundred years. If it is ignored, and the law is broken, then the American people will speak out against it again, as is their duty and their obligation.

Newark Examiner
Special army unit ready to be deployed on American soil just before Nov. elections
April 21, 2010

In October of this year, one month prior to the November midterm elections, a special army unit known as 'Consequence Management Response Force' will be ready for deployment on American soil if so ordered by the President.

The special force, which is the new name being given to the 1st Brigade Combat Team of the 3rd Infantry, has been training at Fort Stewart, Georgia and is composed of 80,000 troops.

According to the Army Times,

"They may be called upon to help with civil unrest and crowd control or to deal
with potentially horrific scenarios such as massive poisoning and chaos in
response to a chemical, biological, radiological, nuclear or high-yield
explosive, or CBRNE, attack."

The key phrase is 'may be called upon to help with civil unrest.'

This afternoon a local radio talk show host reported that he had been in contact with a member of the military. This military source stated that the armed forces have been alerted to the strong possibility that civil unrest may occur in the United States this summer, prior to the midterm elections of 2010.

The source described this as 'our long, hot summer of discontent' that could be eerily reminiscent of the summer of 1968 when riots broke out in many of our largest cities.

However, the summer of 2010 could well be much worse due to the players involved. In 1968 the major players were war protesters. This time, the outrage simmering beneath the surface of American society involves a broad cross-section of the heartland, and most of them are heavily armed...

Read the rest here.

93% Of Commodity Specs Believe that Gold Price Will Decline; US Financial Model Is a Threatened Specie

Of course that pun in the title is intended. How could you even ask?

Mom and Pop America, unlike their Asian counterparts, and most speculators apparently, do not favor the precious metals like gold.

They might be right. But sometimes it is safest to be positioned comfortably far from the maddening (pun intended as in 'frenzied' and 'annoying') crowd.

For me that entails being on a short term hedged trade, long stuff and short fluff.

The US financial sector, as represented by the bloated banks, are overvalued based on a business model that relies on gaming the system, routinely defrauding their customers, adding little value to the global economy except for themselves, and feeding off the wealth creation and the labor of the many. That seems to be coming to an end, perhaps not tomorrow, but as time goes by.

If stocks take a serious tumble in the US we'll know which way the wind is blowing. If gold holds its ground, we will have an indication that it is ready for the next leg up, because the drop in stocks is based on a disgorgement of assets which have lost their appeal and confidence because of the repeated, increasingly reckless, and virulent frauds of the American oligarchs.

Commodity Online
Poll: 93% of Investors Believe That Gold will Fall
By Rutam Vora
21 April 2010, 10:49 a.m. EST

(Commodity Online) -- At a time when gold prices reeled under pressure, for a sustained period after hitting their all-time high in December 2009, the perception towards the yellow metal seems to have reversed with investors hinting at weakening of gold prices in the near future and strengthening of other investment avenues...

In an online opinion poll conducted by Commodity Online, a majority of the respondents have hinted at a possible fall in gold prices in the near future, and better earning opportunities will come knocking on the door.

In an online poll of a sample size of 21,600 respondents selected from across the globe, 93% or 20,100 of the total sample size had opined that there would be a fall in gold prices due to a recent upbeat mood in the global equity markets, while only 1,400 respondents contradicted the stand, 0.46% did not comment on either side. This showed that most of the respondents believed that there would be a fall in gold prices in the near future due to a recovery in global equity markets.

However, with regard to the other metals being an investment destination, most of the respondents maintained a view that they (base metals) can potentially become alternative investment instruments. As many as 64.35% of respondents considered base metals as a potential investment instrument but of them, 53% still chose gold as a preferred investment instrument compared to base metals, while 46.76% preferred base metals to gold....

Similarly, of the total respondents as many as 53.1% believed that the US dollar would replace gold from its status of 'safe haven.' Looking at the recovery of the US economy from the nightmarish recession which had started from the US and hit the world economy in 2008, the dollar was found gathering steam once again. However, 46.8% of the respondents contradicted the view and maintained their skepticism towards the dollar and put gold to their preferred investment mode...

US Unveils an Even Newer New $100 Bill

The new $100 US bill will go into circulation on February 10, 2011.

It is being put forward as a new form of currency with stronger anti-counterfeiting measures to help stem the tide of non-official monetary expansion.

I suspect at some point it will facilitate a 'recall' of the old notes, as a means of combating cash and carry businesses and money laundering. It will also seek to unhinge cash hoarding overseas tied to the drug trade.

It has not been announced if these bills will be carrying an expiration date to insure freshness.

Secretary of Treasury Tim Geithner will be auctioning the crayons he used to sign his name to the bill on eBay to help defray the national debt. His handle is 2RB-O-TimEE.

New Money Homepage

Wall Street Journal
U.S. Unveils New $100 Bill
By
DARRELL A. HUGHES
April 21, 2010

WASHINGTON—Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke unveiled a new $100 bill equipped with two new security features.

The bill will go into circulation Feb. 10, 2011.

The Fed, along with the Treasury Department, the Bureau of Engraving and Printing and the U.S. Secret Service, "continuously monitor the counterfeiting threats" for each denomination and redesign decisions are made based on those threats, Mr. Bernanke said.

"This job has become more complex in recent years as technology advances and U.S. dollar flows expand and increase," he added.

The bill—the highest denomination of all U.S. notes—circulates widely around the world, with circulation in the past 25 years growing to $890 billion from $180 billion.

About two-thirds of all $100 notes circulate outside the U.S.; Mr. Bernanke said the agencies must ensure people around the world are aware of the design change. Over the next several months, officials at the agencies will work to educate cash handlers,
consumers and others about the design and explain how to use its security features.

The 6.5 billion or so $100 notes in circulation now will remain legal tender, Mr. Bernanke said.

The new bill's security features include a blue 3-D Security Ribbon on the front of the note that contains images of bells and 100s, which move and change from one to the other as you tilt the note, according to joint release from the agencies.

Another security feature is the "Bell in the Inkwell" image that changes color from copper to green when the note is tilted, an effect that makes it appear and disappear within the inkwell. (For more on the redesigned note and its features, visit www.newmoney.gov.)

"As with previous U.S. currency redesigns, this note incorporates the best technology available to ensure we're staying ahead of counterfeiters," Mr. Geithner said.

The new design for the $100 note retains three effective security features from the previous design: the portrait watermark of Benjamin Franklin, the security thread, and the color-shifting numeral 100.

The Financial Oligarchy in the US

If you do nothing else this week, read the transcript or watch this video.

I have a serious difference of opinion with the speakers with regard to Robert Rubin and his role, but they make up for it with their description of Jamie Dimon as close to the White House and one of the most dangerous men in America today.

And I thought it was interesting that Simon Johnson would say openly that the ONLY Senator who is speaking the truth plainly is Ted Kaufman from Delaware.

Other than that they are substantially putting out a very sound and realistic view of the root of the problems that created the financial crisis, and what requires to be done to rebalance the system and create a sustainable recovery.

BILL MOYERS: And you say that these this oligarchy consists of six megabanks. What are the six banks?

JAMES KWAK: They are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.

BILL MOYERS: And you write that they control 60 percent of our gross national product?

JAMES KWAK: They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.

BILL MOYERS: And what's the threat from an oligarchy of this size and scale?

SIMON JOHNSON: They can distort the system, Bill. They can change the rules of the game to favor themselves. And unfortunately, the way it works in modern finance is when the rules favor you, you go out and you take a lot of risk. And you blow up from time to time, because it's not your problem. When it blows up, it's the taxpayer and it's the government that has to sort it out.

BILL MOYERS: So, you're not kidding when you say it's an oligarchy?

JAMES KWAK: Exactly. I think that in particular, we can see how the oligarchy has actually become more powerful in the last since the financial crisis. If we look at the way they've behaved in Washington. For example, they've been spending more than $1 million per day lobbying Congress and fighting financial reform. I think that's for some time, the financial sector got its way in Washington through the power of ideology, through the power of persuasion. And in the last year and a half, we've seen the gloves come off. They are fighting as hard as they can to stop reform.

The Financial Oligarcy in the US - Bill Moyer's Journal

US Dollar Very Long Term Chart

"A sentiment of trust in the legal money of the State is so deeply implanted in the citizens of all countries that they cannot but believe that some day this money must recover a part at least of its former value. To their minds it appears that value is inherent in money as such, and they do not apprehend that the real wealth, which this money might have stood for, has been dissipated once and for all.

This sentiment is supported by the various legal regulations with which the Governments endeavor to control internal prices, and so to preserve some purchasing power for their legal tender. Thus the force of law preserves a measure of immediate purchasing power over some commodities and the force of sentiment and custom maintains, especially amongst peasants, a willingness to hoard paper which is really worthless...

If, however, a government refrains from regulations and allows matters to take their course, essential commodities soon attain a level of price out of the reach of all but the rich, the worthlessness of the money becomes apparent, and the fraud upon the public can be concealed no longer."

John Maynard Keynes, Economic Consequences of the Peace, NY, 1920, p. 239-40

SP Futures, NDX Futures, US Dollar, No Sell Signals Yet

The big drop in the SP 500 last Friday triggered by the Goldman fraud charges was not confirmed at all by the NDX.

The SP 500, rightly or wrongly, is where much of the market manipulation of stocks is said to occur. It is a lead index for us, but we watch the NDX along side it, and vice versa. A genuine change in trend must be confirmed before we would take positions in size against the prior trend.



Bullish sentiment is starting to roll over. It has not yet challenged a level that would signal a bearish reversal. It is enetered a period of consolidation and sideways chop. If it penetrates the second moving average band it would be a strong trend change signal.



The US Dollar as measured by the DX Index is in a consoldiation within its uptrend. It has not yet broken serious support to signal a change in trend.

Net Asset Values and Premiums of Certain Precious Metal Trusts and Funds

The US Financial Media Does Not Disappoint, But Will Obama?

"And this is good old Gotham,
The home of the rich and the odd.
Where Morgan talks only to Goldman,
And Goldman talks only to God."

Andrew Stanton, with compliments to
"Boston Toast" by John Collins Bossidy

The spin was running hot and heavy this morning.

The scandal was a one off, a rogue trader. The charges against Goldman are weak, nothing illegal, perhaps just immoral. But morality is not an issue with qualified investors, who should have known better. This has never happened before and is unlikely to happen again. No one forces anyone to be victimized by a fraud. They did it to themselves.

The outstanding talking head on Bloomberg TV was guest salesman Tom Brown of Second Curve Capital, who never met a Wall Street pustule he didn't wish to feed upon. He was supported eagerly by the bobbing heads of Adam Johnson and some less memorable sycophant. And of course the ineffably endearing news anchor, Betty Liu, who is an understudy for Alicia Silverstone in the Wall Street version of Clueless.

But CNBC's Steve Liesman put out a description of the scandal that was so outrageous that it made Mark Haines cough up a donut. Mark still has a conscience apparently but Steve left his at a pawn shop in Moscow. His economic arguments, along with Cramer and Kudlow, drove me away from CNBC long ago. But there is little refuge at Bloomberg anymore except in the off continent off hours, and Fox, well, it is Fox.

I expected a slime trail to appear early on, and I was not disappointed. And its a shame.

Charley Rose has a special on Goldman tonight and it should be worth watching. Charley is a journalist, and tends to show some integrity, which is an increasingly rare commodity in the American mainstream media.

Most Likely Outcome

Goldman will settle out of court, while admitting no fault, after making a great deal of noise to salvage their reputation and lay out a defense for the civil suits that will follow IF Obama does not call in the FBI and Justice to do a more thorough job of investigating the firm and their variety of dodgy deals.

The penalty will be a disgorgement of 15 million, plus a penalty of maybe 45 million. This is just the cost of doing business compared to the billions they took down in side bets like the Credit Default Swaps when the subprime card table tipped over.

The Dems will get Chris Dodd's toothless financial reform passed, and within five years at least one Wall Street firm will roll over and be 'virtually bailed out' at great cost to the taxpayers under its provisions. After he leaves office citizen Obama will say he should not have listened to Larry Summers' advice and ought to have done more to reform Wall Street, despite determined Republican opposition. hi ho

That is the usual outcome. It *could* change, Obama can change it and he doesn't need the Republicans to ask the FBI and Justice to assist the SEC in their civil case investigation to look for evidence of criminal wrongdoing including Paulson and other hedge funds under the RICO statutes. That would show us something about him, at least differently from what I think of his character now. I don't hold much hope for it given the enormous sums that Wall Street is contributing to the Democrats. But I'm prepared to be surprised.

Or it could change if the people shake off their cynicism and lethargy, and a "million person march" goes to Washington this summer, and peacefully demonstrates that business as usual is no longer acceptable. And then they put some bite into it and vote out the incumbents in the fall elections, voting heavily for third parties dedicated to real change.

That is also unlikely but I am prepared to be surprised.

But in the meantime, Europe and Asia should start counting the silverware, and hide the women and children, because the dogs of Wall Street are still on the loose, with little effective restraint.

Goldman Sachs: A Pattern of Organized Criminal Behaviour?

Chris Whalen provides some excellent commentary on the Goldman Sachs fraud inquiry by the SEC at the beginning of his weekly newsletter, The Institutional Risk Analyst.

In addition to the information he provides about other deals, including those that specifically targeted AIG, he puts an interesting twist on this. He intimates that at times the Hedge Funds were acting in concert with the Big Banks as off-balance-sheet accomplices in crafting these complex frauds. And the Paulson - Goldman scandal may only be one of a type, and not perhaps the best or most flagrant example.

A reaction from many is that this is just the tip of the iceberg, a single point in a much larger picture of calculated fraud involving many more deals and significantly more money up to and including the bailout of AIG.

It is not enough to throw a few token fines on some selective deals, and then dismiss them as outliers, and then suggest we 'move on' to reform the market. The spin will be that what Goldman did was 'legal' but immoral. And for many today, morality is simply a matter of taste. And Paulson will be served up as the fall guy. It will take a serious investigation to uncover all the facts, and make the case stick. And the SEC is not competent to do this, for a variety of reasons.

And the reforms that the Congress will create as a result of this, at the least the ones permitted by Jamie and Lloyd, will quickly be circumvented with new fraudulent devices and it will quickly be business as usual. Its hard to say that the business has never stopped, even now. The Big Banks continue to manipulate markets and abuse derivatives as instruments of financial fraud.

The absolute worst place to conduct a serious investigation will be in front of the Congress is a show trial, designed to give some of the Senators and Representatives an opportunity to create sound bytes of anger, to be played in commercials for their re-election, and then at then end of the day, continue to collect fat campaign contributions, and then do nothing.

It does not require Republican permission for President Obama to direct the FBI and the Justice Department to begin a serious inquiry with an eye to RICO violations in what may be one of the largest financial frauds in history, dwarfing the Madoff Ponzi scheme in terms of value and number of victims.

Oh, and by the way, we hate to say we told you so, but please fire Larry Summers now that Bill Clinton has thrown him under the bus, and have him take Rubin's other protégé, Turbo Timmy, along with him.

My concern is that the American people even now do not understand how serious this crisis is. They are quickly distracted into ridiculous partisan spirit and frivolous diversions. This is the freedom and the welfare of their country that is at risk, and it is time to put aside childish things, and begin the serious work of reforming their financial system, the ownership of their media, and the political campaign process.

Institutional Risk Analyst
Goldman SEC Litigation: The End of OTC?
By Chris Whalen
April 19, 12010

Last Friday's announcement by the SEC of a civil lawsuit against Goldman Sachs (GS) for securities fraud did not surprise us. Nor were we surprised to see the markets
trade off large on the news, evidence to us that there is a certain lack of conviction in the financials.

Q: How can you have "normalized earnings" in an abnormal industry?

No, what surprised us about the SEC action is that it took as long as it did. Maybe surprised isn't precisely the right word, but you know what we mean. The inertia in the system seems to dampen reactions to extreme outlier behavior to a far too great a degree. This week in The IRA Advisory Service we discuss the implications of the SEC action and the likely impact on the OTC dealer community in the months and years ahead.

Readers of The IRA will recall back in 2004 when were started to talk about the regulatory focus on complex structured financial products and the perceived reputational risk to the big firms arising from these unregulated, OTC instruments. Big thank you to Chuck Muckenfuss at Gibson Dunn for the heads up. The "advice" issued by all of the regulators ("Interagency Statement on Sound Practices Concerning Complex Structured Finance Activities") was focused almost entirely on protecting the dealers from reputational risk and not on protecting investors.

The fact of the 2004 notice by the SEC and other regulators illustrates the problem. Regulators clearly knew that a problem existed back then, yet the SEC waited until April of 2010 to actually do something constructive to rebalance the equation, to lean just a bit more in the direction of investors and abit less in favor of the dealers. Keep in mind that it's not like the games played by GS and the Paulson organization were remotely unique. Just about every OTC dealer worthy of the description has at least one deal comp to this thing of beauty.

On March 31, 2010, Bob Ivry and Jody Shenn at Bloomberg published a very important article on American International Group and its losses from insuring collateralized debt obligations structured by, you guessed it, GS. Entitled "How Lou Lucido Let AIG Lose $35 Billion With Goldman Sachs CDOs," the article outlines the process whereby AIG was left on the hook for billions in losses on CDOs sold to TCW Group in Los Angeles.

Whereas in the trades with Paulson GS was helping a client create and then sell short a CDO that was being sold to another client, in the case of TCW the GS firm was helping a client buy toxic loans to be contributed to a CDO in the knowledge that doing so would cause losses to a regulated insurer, AIG. The activities of GS to harm AIG make the subsequent payments by AIG to GS, using money from the US Treasury, seem all the more outrageous.

But the other thing that really bothers us about both the TCW transactions and the more recent revelations about GS and the Paulson firm is the fact that the SEC apparently still does not fully understand the symbiotic relationship between the dealer and the hedge fund. In our view, the funds that were involved with these
transactions and many, many more examples in the OTC marketplace, did not have an arm's length relationship with the dealer. Hedge funds exist at the sufferance of the dealers, who finance and execute and act as custodian for their various strategies and use the funds as short-term storage for inventory.

In the case of Paulson, the information provided by the SEC makes it seem as though Paulson was the party which initiated these transactions and, according to the SEC, paid GS $15 million to arrange and market these CDOs to investors. Paulson was also apparently working as an advisor to GS and collaborating with GS regarding investment strategy. A spokesman for Paulson told The New York Times that all of their dealings with GS and other parties were on "an arm's length basis." We believe that reasonable people can differ on this issue. We also suspect that the nature and the extent of the relationship between GS and Paulson will be the subject of extensive legal and political inquiry in the weeks and months ahead.

But for us, the bottom line is that hedge funds often times are merely extensions of the dealers with which they interact. It is often difficult if not impossible to tell where the dealer's interests end and those of the hedge fund begin, especially when the dealer and the fund seem to be working in concert to create securities that are being sold to third parties. This episode is a terrible mess and, to us at least, illustrates why the OTC markets for securities and derivatives need to be regulated out of existence -- or at least into compliance with norms of disclosure and fair dealing that would render such strategies impossible. If the global financial markets have been reduced to nothing more than beggar thy neighbor, then we all have a big problem.

JP Morgan Responds to Calls for Goldman Investigation By Warning Germany on Banking Regulation, Asks for More Influence On European Politicians

'"When profits fall too sharply then capital will move somewhere else, where there is more money to be earned, for example non-regulated markets," Chief Executive Jamie Dimon said in the German mass circulation Sunday paper Welt am Sonntag. "The question is, is that what regulators want?"... he also said the banking industry could do with more influence on politicians." Reuters

In response to calls for an investigation of Goldman Sachs and tighter regulations on the Wall Street Banks, the CEO of JP Morgan has delivered fresh promises of financial damage if the Banks are restrained in their derivatives dealings by government regulation, and even more arrogantly, demanded greater access to European politicians.

Germany would do well to send a strong message that the European government will not be intimidated by financial threats and manipulation by foreign banks, no matter how powerful in both size and political connections.

Appeasement does not work against unbridled greed and pervasive fraud. It picks its victims, one by one, but none are safe.

The solution to this is simple. Take away the power of the large Multinational Banks to sway markets with their enormous derivatives positions.

They seek to control you by controlling your currencies and the issuance of debt. This is nothing new, except for the scale and power of a few Banks, most of which are US based.

This interview could be the result of a cultural misunderstanding. The New York Bankers are accustomed to threatening the US politicians and people if they do not get their way. This is what they had done when they received their trillions in public money with much secrecy and little accountability

Break the Banks up, and put them to the traditional task of allocating capital to commercial markets. If the US will not reform the financial system, ban them from any banking activities in your region.

Change the dollar reserve currency system which is firmly in the hands of the Wall Street money center banks, their friends at the Treasury and in the Congress, and their employees at the Fed.

Do it now while you still can.

Reuters
JPMorgan chief warns of overregulation
By Vera Eckert
April 18, 2010

(Reuters) - The head of JPMorgan Chase & Co (JPM.N) in a German newspaper interview on Sunday turned against the possibility of stricter bank regulation and asked for better access for bankers to politicians.

"When profits fall too sharply then capital will move somewhere else, where there is more money to be earned, for example non-regulated markets," Chief Executive Jamie Dimon said in the German mass circulation Sunday paper Welt am Sonntag.

"The question is, is that what regulators want?," said Dimon who heads the second-largest U.S. bank.

Dimon has been an outspoken critic of the Obama administration's proposed financial regulatory reforms, particularly of a proposed bailout fee on big banks which he has called a "punitive bank tax."

In the German interview, he also said the banking industry could do with more influence on politicians.

Both the industry and government wanted what was best for their country and the economic system but there were areas where the banks lacked possibilities to demonstrate their arguments to politicians and supply them with the right facts, he said.

A Modern Tale of Financial Loss

A developer (Goldman) built houses that looked well built, but were in reality designed to be firetraps, using plans provided by an architect (Paulson). They were sold as conforming to code with certain characteristics represented and endorsed by the building inspectors (Ratings Agencies) and overseen by fire inspectors who did spot checks (the SEC).

After the sale, the developer and the architect bought huge amounts of fire insurance on the homes from a friendly insurance agent (AIG London) who was eager to collect the commissions. The amounts that were insured were sometimes well in excess of what a home might actually be worth. They even took out policies on nearby homes that they had not even built or sold.

The developer had also encouraged the city government to allow the firetrucks and safety equipment to fall into disrepair, and for too few inspectors to be hired to do spot safety checks. So when the houses inevitably burned, the fire department was unable to adequately respond. The fires became so bad that they destroyed entire neighborhoods and threatened whole sections of the city.

The developer and architect were able to submit their insurance claims for sums that were so staggering that the insurance company for which the London agent worked was itself facing bankruptcy. This would have placed at risk the holders of its other policies in completely unrelated areas such as life and auto insurance, and retirement annuities.

So the developer had government people, whom he had helped to elect, provide government backing for the insurance company, for the good of the public. The people who had lost their homes and those who were forced to help to pay the developer were very upset.

But the developer was a large advertiser in the local newspaper, and a old school friend of the owner, so it ignored the complaints, and reported on the story from every perspective except what had really happened. It blamed the people who had lost their homes for being foolish and not inspecting the homes more closely, and taking the developer and the housing inspectors at their word, and trusting the fire departments and its inspectors to do their jobs.

And anyone who complained too loudly was at first ignored, then ridiculed, and finally threatened with arrest. After all, the developer was one of the most important and influential people in the city, and had many powerful friends. Any suggestion that they had done anything wrong was simply unbelievable.

After all, it is inconceivable that an upstanding member of the commuity would ever endanger so many people's lives and homes like that just for personal profit.

The End (for now)