Bullion Denominated in Euros, Pounds and Swiss Francs At New Record Highs as the IMF Prepares for a Currency Crisis

What many traders are starting to realize is that the precious metals plunged with stocks in the recent market dislocation in 2008 because it was a 'liquidity crisis' among private institutions triggered by the credit unworthiness of individuals that provoked a general selling of assets.

What we are experiencing now is a sovereign debt (credit worthiness) crisis, which is really a currency crisis. A fiat currency is backed by nothing except the 'full faith and credit' of the issuer. It is not that it would have to be 'different this time' as some would think. It's not even the same thing, a different type of a crisis entirely.

The markets are assessing the risks of various currencies and countries with regard to default. Gold, and to some lesser extent silver bullion, are wealth that is sufficient to itself, requiring no backing from any particular country. Quite the opposite, there are large short positions and highly leveraged paper commitments, that present significant counterparty risk to the upside, because it is unlikely to be deliverable at anything near current prices.

Regulators have long turned a blind eye to what some contend are officially sanctioned shenanigans and secretive leasing and selling. This is becoming increasingly difficult for the central banks to manage, and we may approach a breaking point unless the financial engineers and politicians can head it off once again. They have a strong vested interest in hiding their past dealings, as we saw in the case of Mr. Gordon Brown in the UK.

If there is a new panic selloff, all assets will again be liquidated in the short term, including the metals. But their rebound may be quite sharp and potentially rewarding if the sovereign debt crisis continues, since the search for safe havens will be even more aggressive, as the seats in the shelters are quickly taken.

This is why the IMF is meeting in Zurich on May 11, ahead of the formal discussions scheduled later this year to discuss the reweighting of the SDR. There is a currency crisis on the horizon, and it may involve not only the PIIGS, but the larger developing countries including the US and the UK. And they are preparing contingency plans, and seeking to head it off.

I do not necessarily view this as gold and silver positive, because when central bankers get together to work their schemes on the markets, valuations may not be based on any fundamentals. The financial engineering of the central banks has been largely deleterious to individual wealth among the public, and there may be some shocking disclosures of market manipulation yet to be heard. The central bankers may be as compromised and hypocritical as their corporate cousins.

But if 'the fix is in' and the wealthy have indeed been buying bullion ahead of the public, then we might see something happen later this, and it could be quite impressive. The amount of 'book talking' being done on behalf of large institutions by paid analysts approaches the level of the appalling, even for such a recently tarnished profession.

By the way, the 'tease' today is that Jimmy Rogers is said to have turned rather bearish on stocks, and says he is getting quite short on one of the big western financial institutions which everyone believes is solid and well founded. He thinks it may soon become involved in the financial crisis. He would not reveal the name. We have a poll running until 9 PM Eastern US time for you to take your best guesses. No I did not include the US Treasury in the list.

As for the theory that currencies gain in strength if there are debt defaults, this is only if the taxation and production levels remain relatively constant or higher, and the debt destruction is within the debt which is owed by private parties. When sovereign wealth is destroyed this is a de facto default, and potentially corrosive as acid to a currency's value.

"Bullion denominated in euros and Swiss francs surged to new record highs this morning. The euro has again come under severe pressure as contagion risks increase. While all the focus is on Europe right now, similar risks face the UK and US economies and this is leading to significant safe haven demand for gold internationally. Prices have risen close to a new nominal record against the British pound and the highest level in yen since February 1983. Gold is slightly higher in most currencies this morning and significantly stronger in British pounds and euros - trading at $1,185.00, £786.03 and €925.72 per ounce this morning. Markets await the ECB rate decision and UK general election with interest."

Sovereign Debt Demands

"This is why the International Monetary Fund (IMF) and the Swiss National Bank (SNB) are jointly hosting a High-Level Conference on the International Monetary System in Zurich on May 11, 2010. The conference is set to analyse the global financial crisis and will provide an opportunity to exchange ideas on a number of related topics, including sources of instability in the international monetary system, improving the supply of reserve assets, dealing with volatile capital flows, and possible alternatives to countries’ accumulation of reserves as self-insurance against future crises.

The conference will bring together a group of high-level participants, including central bank governors, other senior policymakers, leading academics, and commentators. The key objective of the conference is to examine weaknesses in the current international monetary system, and identify reforms that might be desirable over the medium to long run to build a more robust and stable world economy. The event will be concluded with a joint press conference by SNB Governor Philipp Hildebrand and IMF Managing Director Dominique Strauss-Kahn.

There is speculation that the conference may have favourable implications for gold with proposals that gold reserves may again have some form of role in bringing stability to the international monetary system."

Metal Commentary by GoldCore

Jim Rogers: More Turmoil Ahead in Global Financial Markets

Clusterstock: Jim Rogers Is Now Shorting A Major Western Financial Firm That Everyone Thinks Is Sound

As for my kitchen, we are plating financials short and bullion long all this week. But this may not be on the menu into the Friday US nonfarm payrolls, at least not in the same combinations and prices.

Jim Rickards: Gold, Silver, and a May 11 Meeting to Discuss Global Currency Issues

Gold is showing a potential inverse H&S pattern.



Silver is in a well-defined uptrend.



As are the miners.

But all bets are off for the miners and silver most likely if US equities head south.



Jim Rickards on CNBC discusses the May 11th IMF meeting in Switzerland
to discuss the dollar alternatives, the SDR and gold.

And it is worth watching the reactions of the CNBC anchors to what their guests
have to say, and the elegantly polite way that Rickards deals with Joe Kernen.



It's kind of sad that after all these years Joe Kernen is Becky Quick's assistant.

Doesn't he have seniority or something? Can't Immelt throw him a bone?

US Dollar DX Index - Breakout or Fakeout? Flight to Safety

The Buck managed a big push higher through a key fibonacci retracement level today, and right to the top of the uptrending channel, largely on fresh euro weakness.

Here is where we see the breakout or the fakeout, at least in the short term.



The way in which gold is holding its level despite repeated and concentrated bear raid originating from the Comex is remarkable, and has caught much of the deflation trade by surprise.

I suspect this is because the current crisis is a sovereign debt or currency crisis, with both the dollar and gold serving as 'safe havens.' Gold continues to hit new highs in a number of non-US currencies.

SP Futures Daily Chart, Cash Weekly Chart, VIX, and the 50 DMA

A dead hit on support intraday, and a bounce back to support a little higher.

We are in our target bottom for a 'correction' now, and this is where bully must make his stand or risk violating a potential H&S neckline at 1155, with a measuring objective down to 1090 or so.

Keep an eye out for the Non-Farm Payrolls number on Friday.



VIX, the volatility index, has risen to levels not recently seen, and may be signalling at least a temporary hiatus in this decline. If you look at the topmost part of the chart you will see that the nominal SP 500 index has violated its 50 DMA. This is known as 'bad news' and bully needs to do a save here. The NFP report, if properly massaged by the reform government, might do the trick.



The SP 500 cash index weekly chart shows how important the 1150 level as trend support, and how much potential air is underneath it.

Currency Wars

"In his latest letter, Mylchreest reckons we are now in the ‘Third Gold War' since the Second World War and this is being waged between the USA in conjunction with other western countries/institutions, notably the IMF, and various opposing sectors worldwide. In his contention, the U.S. and its allies lost the first of these ‘gold wars' to the French (then under De Gaulle) and the second to the Middle East, helped significantly by the then pro-gold stance and purchasing power of the German Deutsche Bank .

This latest Gold War has been/is being fought covertly. "High profile sales of physical gold have, for the most part, been replaced by sales of "paper gold" in the form of futures, OTC options and unallocated gold, etc." asserts Mylchreest. But this time he reckons the veil has been lifted and the whole charade is beginning to unravel. Instead of France or Arab nations, the opponent this time is China - the 800 pound gorilla - potentially an even more formidable opponent, with a huge treasury of trillions of dollars with which to back its moves. It's not just that it is the Chinese government which is the major participant, but also now that gold and silver ownership is being promoted to the populace there by government institutions, there is the huge pent-up, and growing interest in precious metals of the rapidly increasing Chinese middle class and its potential to affect the global demand patterns."

China: the Gorilla in the Third Gold War, Lawrence Williams

The gold war as described above is just one front in a greater and more general 'currency war' that is evolving as the empire of 'the US dollar as the reserve currency,' which has been in place since the end of WW II, declines and finally falls in the profligacy and crony capitalism of the Federal Reserve Bank and the Treasury.

This battle may manifest itself more publicly later this year in the debate over the reconstitution of the basket of currencies that the IMF's Special Drawing Rights (SDR) will contain.

What Will Be the New World Reserve Currency

Russia Calls for Changes to the SDR

The SDR may not be the successor to the dollar hegemony in the short term. The BRICs may lobby hard enough to legitimize it, and even to include some gold and silver content in addition to the fiat currencies of a greater number of countries. I do not believe that they can be successful without some support from the Petrodollar countries in the Mideast.

I realize that the SDR is just another fiat currency, a somewhat artificial construct for the accounting of international trade, a fiat of fiats if you will. It may even be inherently unstable in the midst of the controlled demolition of most fiat currencies that is now underway.

But from a portfolio perspective it could be useful to take some of the power to control the world's money supply away from the Anglo-American banking cartel and its politicians who have proven themselves to be unworthy of such a great responsibility.

I don't think a direct transition to specie is feasible. Inclusion of gold and silver in the SDR provides an evolutionary path.

One cannot help but wonder if the current bear raids on the EU and the euro by the financial predators and economic hitmen, the gangs of New York, is designed to bring them to heel in the SDR debate tne this phase of the currency war, and to diminish the potential role of the euro in the newly created basket of world currencies.

If the new currency unit the SDR is used only for international settlements and reserves it may be successful. However, if it is promoted as a general currency for domestic usage, then one only has to look at the current troubles in Europe to understand what a trap this is.

Unity of currency without unity of government and fiscal policy and taxation is difficult if not impossible to maintain. One world currency is the step to one world government. And those who control the currency will, almost inevitably, control the people of the world.

"Basically, what Economic Hit Men are trained to do is to build up the American empire. To create situations where as many resources as possible flow into this country, to our corporations, and our government, and in fact we've been very successful...We knew Saudi Arabia was the key to dropping our dependency, or to controlling the situation. And we worked out this deal whereby the Royal House of Saud agreed to send most of their petro-dollars back to the United States and invest them in U.S. government securities...The House of Saud would agree to maintain the price of oil within acceptable limits to us, which they've done all of these years, and we would agree to keep the House of Saud in power as long as they did this, which we've done, which is one of the reasons we went to war with Iraq in the first place...So we make this big loan, most of it comes back to the United States, the country is left with the debt plus lots of interest, and they basically become our servants, our slaves. It's an empire. There's no two ways about it. It's a huge empire. It's been extremely successful...This empire, unlike any other in the history of the world, has been built primarily through economic manipulation, through cheating, through fraud, through seducing people..."

John Perkins, Confessions of an Economic Hitman

“Currency warfare is the most destructive form of economic warfare."

Harry Dexter White, US Representative to Bretton Woods, 1944

"History teaches us that the capacity of things to get worse is limitless. Roman history suggests that the short, happy life of the American republic may be coming to its end... [the US will probably] maintain a facade of constitutional government and drift along until financial bankruptcy overtakes it. Of course, bankruptcy will not mean the literal end of the United States any more than it did for Germany in 1923, China in 1948, or Argentina in 2002-03. It might, in fact, open the way for an unexpected restoration of the American system, or for military rule or simply for some development we cannot yet imagine. Certainly, such a bankruptcy would mean a drastic lowering of our standard of living, a loss of control over international affairs, a process of adjusting to the rise of other powers, including China and India..."

Chalmers Johnson

Guest Post: A Double Dip Recession? A View from the Consumer Metrics Institute

I have been looking for a commentary to share with you all regarding the most recent US GDP report. I wanted something that went beyond the obvious inventory buildup that boosted the number by almost double, and the shockingly low deflator that was used.

Here is a commentary that seems to capture the big picture of where the US economy stands today, and is able to express it simply and clearly.

Richard Davis of the Consumer Metrics Institute does excellent work, and is available for interviews.

Enjoy.

"The April 30th GDP report issued by the Bureau of Economic Analysis ("BEA") of the U. S. Department of Commerce was a freeze-frame quarterly snapshot of a highly dynamic economy -- an economy that another source indicates was in significant transition while the snapshot was being taken.

Compared to the 4th quarter of 2009, the annualized growth rate of the GDP had dropped by 43%. Depending on your point of view this could be interpreted either as a glass that is "half-full" or a glass that is "half-empty":

1) The "half-full" reading would mean that the GDP numbers confirm that the recovery had at least moderated to a historically normal growth rate. In this scenario the good news would have been that "the economy is still growing," albeit at a historically normal rate. The bad news would have been that a normal growth rate would only warrant normal P/E ratios in the equity markets.

2) The "half-empty" reading would have meant that the near halving of the GDP's growth rate confirmed that (at the factory level) the economy had finally begun to "roll over". If so, the BEA's announcement portends even lower readings in the quarters to follow.

What was clearly missing in the "half-full/half-empty" debate was a feel for whether the level seen in the snapshot's glass was stable or still dropping. At the Consumer Metrics Institute our measurements of the web-based consumer "demand" side economy support the "half-empty" reading of the new GDP data. The new GDP numbers (which are subject to at least two revisions) agree with where our "Daily Growth Index" was on November 24th, 2009, 18 weeks prior to the end of 2010's first calendar quarter -- and when that index was in precipitous decline.

A look at our "Daily Growth Index" also shows that towards the end of November 2009 the "demand" side economic activity was dropping so quickly that a two week change in the sampling period would make a huge difference in the numbers being reported. If the sampling period had shifted to two weeks earlier, the reported GDP number would have been 4.4%, substantially higher. However, if the sampling period had shifted to two weeks later, the GDP growth rate would have been only 2.0%, less than half the reading from only 4 weeks earlier. This is the sign of an economy in rapid transition.

The methodologies used by the BEA when measuring factory production are ill suited to capturing an economy in such rapid transition. In the 4th quarter of 2009 the production side of the economy was topping (reflecting the topping of our measurements on the demand side in August 2009). The first quarter's production environment was at a much more dynamic spot in this particular economic cycle, and the subsequent monthly revisions by the BEA may be significant.

From our perspective the GDP is only confirming where our numbers were in November -- which is, relatively speaking, ancient history. Since then we have seen our "demand" side numbers slip into contraction (on January 15th), and they have recently lingered in the -1.5% "growth" range (see charts below). We have long since recorded the "demand" side activity that has been flowing downstream to the factories during the second quarter of 2010. If the GDP lags our "Daily Growth Index" by 18 weeks again we should see the consumer portion of the 2nd quarter 2010 GDP contracting at a 1.5% clip, less inventory adjustments."

"As you can see from the above chart the current consumer "demand" contraction event is unique: if there is a "second dip" it may very well be unlike anything we have seen recently. Instead of a "call-911" type of event in 2008 or the "hiccup" witnessed in 2006, we may be seeing a "walking pneumonia" type of contraction that has legs.

Our data is significantly upstream economically from the factories and the products measured by the GDP, putting us far ahead of the traditional economic reports. Perhaps our data is too timely; we are so far ahead of conventional economic measures that our story generally differs (either positively or negatively) from the stories being simultaneously reported by more traditional sources."

Charts and commentary courtesy of Richard Davis at the Consumer Metrics Institute.

SP Futures Daily Chart

As corrections go its a good start, and the shape of that potential top is fairly ugly as topping formations go.

The Non-Farm Payrolls number is at the end of the this week, and that may overhang the bears a bit unless something exogenous occurs.

Today's sell off had all the characteristics with a flight away from the risk trade and the insubstantial. But in the later part of the day the fear on the ticker seemed to subside and turn into a good old fashioned wash portion of a wash and rinse.

Some believe that this is a 'sign' from the US banking industry to the government that they will not tolerate efforts at reform. That is probably a bit far-fetched.

1160 looks to be a good pivot, maybe 1155. Then we start falling out of the consolidation category into a righteous sell off. Markets never go straight up, and this one is long overdue for a pullback.

The market has run from 1045 to 1215 with no major sell offs save the current action that started in April. That is 170 SP points almost straight up. Trading at 1165 puts it as a correction of 50 points. That's roughly a 4% pullback from the 1215 top, and 30% off the gains from the bottom in February when this leg of the bull started.

Still as a percent from the market bottom in 2009 it's almost nothing, a blip on the radar. So far.


By way of 'sharing a thought,' I'm short, and came into today very short from last night. But I am quite a bit less short right now, but still running a hedged play.

This 'up and down' pattern is pretty typical of a topping pattern or a consolidation, and the kind of action traders like to take when they want to 'wash and rinse' the small players, while they think about which way the market is likely to break.

I don't think that this is overstating it, since this market completed dominated by a few banks and hedge funds on the buying volume. It seems as though volume only shows up on the dips. Like so many traders I am playing the swings in it both up and down to good effect on the short term positions.

At some point it is going to break down or up and you do not want to be on the wrong side of that.

Why Silver?

Here is a 'thought experiment.'

In order to conduct it you have to accept a few postulates, or more properly, hypotheses, as being true without proof.

1. J. P. Morgan is the 'house bank' for the Fed and the Treasury since their forced merger with Chase Manhattan. Goldman may garner most of the high profile publicity, but when it comes to banking, financial engineering, and US economic policy, Blankfein is playing Dutch Schulz to Jamie Dimon's Lucky Luciano, metaphorically speaking.

2. J. P. Morgan, and some of the other Too Big To Fail institutions, sometimes act as an instruments of US policy. This may be an informal arrangement, a phone call. But it happens, and it involves more than just banks. It has been shown to occur with the big media, big corporations, and so why not big money? There is always a quid pro quo involved. Its simple political reality.

3. The US government has become increasingly involved in the management of the economy, from way in which it reports statistics, to the regulation of the financial sector, to the tax policy, and to what amounts to an industrial policy and of course a labor policy. While every government does this as part of their role of being a government, even if by omission, the US began to take a more planned and organized role with the creation of the President's Working Group on Markets in the aftermath of the Crash of 1987. The Exchange Stabilization Fund, established in 1934, was transformed into an opaque 'slush fund' to hand financial crises, most famously in Robert Rubin's extra-congressional actions during the Clinton Administration. What had been informal started to have a core, centralized discussion that exists without oversight. And two key money elements of this group, the Fed and the ESF, resist all attempts at outside audits.

4. From the SP futures to the outsized positions in some of the commodity markets, regulators have been consciously turning a blind eye to some very obvious market manipulation, apparent to anyone involved in the business. While this can be attributed to simple regulatory corruption and capture, in fact these things are often used for other purposes by powerful insiders and politicians. The role of the ratings agencies in support the banks and hedge funds in their various market frauda is interesting. And there is no better way to oblige yourself to the will of the authorities than to be discovered in some breach of the rules.

5. Robert Rubin introduced the policy rule that it is cheaper to head off a market dislocation by buying the futures to head off declines than it is to clean it up in the aftermath. Although this principle is now commonly attributed to a journalist and often dismissed as 'tinfoil hat' speculation I remember vividly when it was first articulated and it was by Robert Rubin. This rule or market intervention has been integrated and expanded, and is now a routine part of US economic policy decisions, again centered around the President's Working Group on Markets. It is a not always used, but it is considered a policy instrument, which is a change. Things like this are intitially proposed to be used in extremis, but like many stimulative drugs, they develop an addictive profile over time. This selective intervention had been performed by private banking pools in the past, most notably J. P. Morgan himself. But it is now firmly embedded in the hands of government.

6. Since at least 1970 the US dollar and financial system have become instruments of its foreign policy in the same way that the US military is an instrument of official policy. There are military conflicts as a means of supporting foreign and domestic policy, and there are also 'currency wars' and what can be loosely described as financial conflicts, for remarkably similar purposes. Sometimes these are overt in the form of sanctions, tariffs, and subsidies, but more often they are subtle, a means of extending political control and influence through debt and currencies, banks and ratings agencies, and supporting one's own corporations and industries.

Now that we have accepted the above for the purpose of this exercise, there comes the question, why silver? Is the United States interested in manipulating the price of silver, and therein the supply of silver in the world, and its uses?

J. P. Morgan has a strategically huge short position in silver, and is using it to 'manage' the price of the market at will. I did not bother to put that into the six postulates because it is a well documented fact, although rendered a bit hazy by official secrecy, bordering on an IQ test. If you fail to see it, try not to use too many sharp or pointed objects.

It is easier to do this with smaller markets like silver when one is using derivatives, as opposed to currencies or something as strategic as oil. I understand the gold market, because gold is a rival currency to fiat money and to the US dollar as the reserve currency. Gold is also the 'canary in the coal mine' and if you were of mindset to control things, you must control gold. Gold has a relationship with interest rates as Larry Summers attempt to prove in his paper, Gibson's Paradox.

But why silver? What strategic or monetary importance does silver have that would warrant so much attention and effort from the US government? Is there some as yet less known application for silver that makes it important? Or is silver just a convenient market to turn over to your cronies as their private sandbox, because it does not matter to you.

The most likely scenario I can imagine is that although silver lives in the shadow of gold from a monetary perspective, it has long been thought of as the 'poor man's gold,' and as monetary instrument for developing regions.

Silver has a long history as a form of currency in Latin America and in China. And although most Americans do not realize it, the US Constitution defines lawful money as both silver and gold.

The US maintains an enormous store of gold, although priced somewhat quixotically at a mythical price of around $42 per ounce, one of the largest in the world. But it has long since depleted its stores of silver bullion, and remains vulnerable to any move to include silver as a nascent currency promoted by the developing nations.

Just as a point of information, I have all of the six premises above as active 'strawmen' in my thinking. I believe there is enough evidence, quite a bit of it circumstantial and unconfirmed, that they are more probable than just possible. So I am content to keep them as data points while new information and data is processed, for and against.

I don't particularly care if anyone believes the premises or not. But they are interesting to consider for the purposes of this experiment in thought. Because the key word here is 'belief.' One cannot disprove any of it, just as one cannot prove it, yet. It takes an enormous leap of faith to believe that the government just lets things happen, and the markets are all happy hunting grounds of pristine humanitarian honesty, and the powerful and the rich do not use their influence to bend the markets to their will. And if the US is not watching out for its own interests in the world, and those of its people, well, it is just not doing its job, and it is incredibly naive to think otherwise. The efficient markets hypothesis is a load of romantically wishful delusion, and more likely propaganda for the masses.

One of the advantages of being your own person and adhering to what hard analysis has led to you conclude is that you can say what you think as long as you state why, and not care overmuch whether people wish to accept it or not, or condemn it as a conspiracy or not. The truth will out.

So, given the above premises, and assuming that few things really happen incidentally and by accident on a large scale when the government is involved, the question has to be asked.

Gold and Oil have an obvious strategic importance. But why Silver?

Early comments:

Mostly the obvious and therefore most highly probable. Its a small market and amenable to manipulation. Since the metal is necessary to industry it has its attractions even if the price rises. It is relatively neutral to government.

Quite a few think that it is a trade gone out of hand, where the shorts are effectively trapped, and cannot manage their way out of it gracefully.

One thing that has not occurred to anyone yet, which is a little bit disappointing, but perhaps too far off the subject, is this. Is it the government at the apex of the policy, the power, or is the government itself just one of the support mechanisms, a powerful member of the demimonde, for the real heart of darkness? Something to think about, but admittedly out of the purview of the thought experiment.

"The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the government of the U.S. since the days of Andrew Jackson. History depicts Andrew Jackson as the last truly honorable and incorruptible American president."

Franklin Delano Roosevelt

GDP Deflator at a Five Decades Low While Income Inequality Is at Record Highs

From this chart sent out this morning by David Rosenberg, we can see that the GDP deflator is at a five decades low.

I tend to believe that the modifications to the inflation measures, including the deflator, that have accumulated by the federal bureaucracy over the past ten years are greatly understating the actual inflation in the economy.

There are very positive benefits for the government to do this. The lower the deflator, the better and higher the real GDP figures will appear. And a low measure of official inflation reduces increases in payments in Social Security and other programs with Cost of Living Adjustments (COLA), including official debt payments on the bonds and the TIPS.



Gold gives the lie to this, which is why it is so hated by financial engineers and statists.

On the other hand, the inequality of income distribution in the US is at level not seen since the 1920's.



There is some good reason to think that government tax and fiscal policies, as well as the monopolistic makeup and subsidized growth of the Banking sector facilitates this wealth transfer and concentration, which has a highly negative impact on real economic growth.

There will be a change, and the trends will be reversed. How they are reversed and what changes will accompany those reversals are very much open to debate, and divergent historical examples. But these changes almost invariably involve a shift from individualism to statism.

"Those who make peaceful revolution impossible make violent revolution inevitable."

John F. Kennedy

Change will come if the system remains as unsustainable as it is now. And what gives me a somewhat pessimistic view is that people never seem to learn the lessons of history.

A Summary of the Goldman Sachs Fraud Case, and the Downfall of Icons

"Le secret des grandes fortunes sans cause apparente est un crime oublié, parce qu' il a été proprement fait."

(The secret of great returns which are difficult to explain is a crime that has not yet been discovered because it has been carefully executed."

Honoré de Balzac, Pere Goriot

There is quite a bit of spin surrounding the Goldman Sachs deal. The best debunking of the spin around the nature and quality of the SEC's case was written by Barry Ritholz.

One of the best summaries of what the deal actually encompassed is excerpted below by Rolling Stone journalist Matt Taibbi.

"Here's the Cliffs Notes version of the scandal: Back in 2007, Harvard-educated hedge-fund whiz John Paulson (no relation to then-Treasury secretary and former Goldman chief Hank Paulson) smartly decided the housing boom was a mirage. So he asked Goldman to put together a multibillion-dollar basket of crappy subprime investments that he could bet against. The bank gladly complied, taking a $15 million fee to do the deal and letting Paulson choose some of the toxic mortgages in the portfolio, which would come to be called Abacus.

What Paulson jammed into Abacus was mortgages lent to borrowers with low credit ratings, and mortgages from states like Florida, Arizona, Nevada and California that had recently seen wild home-price spikes. In metaphorical terms, Paulson was choosing, as sexual partners for future visitors to the Goldman bordello, a gang of IV drug users, Haitians and hemophiliacs, then buying life-insurance policies on the whole orgy. Goldman then turned around and sold this poisonous stuff to its customers as good, healthy investments.

Where Goldman broke the rules, according to the SEC, was in failing to disclose to its customers – in particular a German bank called IKB and a Dutch bank called ABN-AMRO – the full nature of Paulson's involvement with the deal. Neither investor knew that the portfolio they were buying into had essentially been put together by a financial arsonist who was rooting for it all to blow up.

Goldman even kept its own collateral manager – a well-known and respectable company called ACA – in the dark. The bank hired the firm to approve the bad mortgages being selected by Paulson, but never bothered to tell ACA that Paulson was actually betting against the deal. ACA thought Paulson was long, when actually he was short. That led to the awful comedy of ACA staffers holding meeting after meeting with Goldman and Paulson, and continually coming away confused as to why their supposedly canny financial partners kept kicking any decent mortgage out of the deal. In one ACA internal e-mail, the company wonders aloud why Paulson excluded mortgages issued by Wells Fargo – a bank that traditionally created high-quality mortgages. "Did [they] give a reason why they kicked out all the Wells deals?" the quizzical e-mail reads."

Matt Taibbi, The Feds Vs. Goldman

This is fraud, pure and simple. Goldman did not stand by and allow ACA to make its picks. Goldman and Paulson aggressively influenced the selection process, vetoing the good mortgages, and manipulating ACA, setting them up to be the fall guy in what is clearly a premeditated fraud.

The final defense being offered, after the smokescreens and misstatements of what happened have been pulled away, is that there can be no fraud when you are selling to a 'qualified investor' and making a market.

Goldman was not making a market. They were actively creating inherently dangerous products, and then recommending and selling them to their customers, qualified investors or not. It was fraud, and Goldman is a disreputable firm, that has been shown to engage in fraud across many markets and countries and venues. This particular scam with ACA is small change compared to the setting up of AIG, and the foul bailout ripped from the public with the collusion of the NY Fed.

Anyone who looked at their trading results, many standard deviations out of the norm, would have to know that there was some sort of fraud and market manipulation involved. It is the Bernie Madoff syndrome; the professionals all knew he was cheating somehow, but were more than willing to go along with it and turn a blind eye while it was to their advantage. And Goldman had the politicians in their pocket, and so they were powerful, not to be crossed. Almost as powerfully connected as the Fed's house bank, J. P. Morgan.

Warren Buffet and Charlie Munger have come out recently in defense of Goldman, attempting to paint this fraud as the work of a single rogue trader. That of course is a part of the spin, the carefully thought out and premeditated fraud which had ACA and then Fabrice Tourree as the designated scapegoats.

Warren holds quite a bit of Goldman Sachs stock. And all he and Charlie have shown is that once you strip away the trappings and the masks, the ornamentation and the legend, what you are left with is someone who is willing to lie down with pigs when the money is right. So the question is not what kind of man Warren Buffet is, but rather, what is his price.

When the tide goes out, we indeed see who is naked, and who is not. And it is not a pretty picture.

Times Square NYC Evacuated as Failed Car Bomb Discovered

American News sources are reporting that an abandoned automobile left in Times Square at 7th Ave. and West 44th St. has been discovered to have false license plates, and to contain propane tanks, gasoline, burned wiring, and black powder.

Witnesses report a flash from the back of a Nissan SUV, and smoke coming from the back of the vehicle. Police originally responded to reports of a car fire.

Car Bomb Scares Times Square - Washington Post

Breaking News - Times Square Evacuated- NY Times Online....

Retraining and Rehabilitation of Financial Sector Employees May Be a Daunting Task

Prospero: Mark but the badges of these men, my lords,
Then say if they be true...
These three have robb'd me, and this demi-devil—
For he's a bastard one, had plotted with them
To take my life. Two of these fellows you
Must know and own; this thing of darkness I
Acknowledge mine.

Caliban: I shall be pinch'd to death.

The Tempest Act 5, scene 1

"Even knaves may be made good for something."

Jean-Jacques Rousseau

According to the email below there is some concern among employees in the financial services sector about their future employment prospects if reform legislation should be enacted, and some tentative, but perhaps unrealistic plans, of coping with it if it happens are expressed.

I can always use a little help around the kitchen and the yard, cleaning up and minor repairs, and I would gladly pay a fair wage based on effort, moderated by experience and capability. My son and helper is leaving for university soon to begin his studies in engineering, which is the manipulation of real things for practical purposes with benefit to the customer. So it might be unfamiliar to you. And I am not getting any younger.

By the way, since most of the suburban teaching jobs are filled, have you considered going back to school to learn to be a Registered Nurse? There will be plenty of openings in nursing homes and hospices, and your selfless dedication to hard and sometimes distasteful work will be most useful and appreciated.

I suspect there will be a lot of cheap labor available from dislocated FIRE sector workers in the years to come, as well as from those serving out community service judgements. At least the highways will be cleaned of litter. Perhaps exposure to the common people and honest labor will do them some good.

I am a little concerned that this type of person probably has little or no practical skills, but they do claim to bring high energy and a willing spirit, so it could be put to work on the cleaning up of America and Europe, and the rebuilding of their infrastructure. They make themselves sound like teachers, firefighters, policemen, or even soldiers, but there are dimensions of duty and honor and self-sacrifice and service to others in those callings far beyond any monetary recompense of which they probably have little experience or even a vaguely realistic expectation.

His or her description of what it is like to teach elementary school is good for a laugh. Someone is in for a rude awakening.

All things considered, we can surmise that there is no excess of common sense in their portfolio, or an ability to listen well and learn about things which they think they know, but really do not understand at all. That speaks to the main question which is, 'are they educable' or will they be prone to recidivism?

I find it hard to believe, however, that this letter is anything but a hoax. But considering the imputed source of these sentiments is the "derivative of a human being," it could be genuine. I am a bit undecided, but will allow for it.

So grab a pair of gloves, my boy, and I will be glad to teach you how to prune a tree and clear some brush. But although you might be willing to do it more cheaply, don't expect to displace the little girls of their job of walking the dog to earn money to purchase new dollies. They can be more ruthless and determined than the most hardened union boss. And the nine year old tells me she is still the strongest person in her class, but boasts of it less of late, owing to a nascent attraction to a classmate known only as 'Will.' But you might be able to help them with the clean up.

And if you should happen to play any card or board games with them, I warn you beforehand, they cheat, obviously, clumsily and shamelessly, to win, with a somewhat cavalier regard for the written rules. Ah, but I forget, that has long been your raison d'etre, your hallmark, and a particular area of specialization and expertise.

Time, life and a benevolent and orderly society tend to teach children to be better, to be human, essere umano. But apparently it does not always at first succeed, and must try, try again.

The Reformed Broker
An Email Purported to be Making the Rounds of Wall Street

"We are Wall Street. It's our job to make money. Whether it's a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn't matter. We would trade baseball cards if it were profitable. I didn't hear America complaining when the market was roaring to 14,000 and everyone's 401k doubled every 3 years. Just like gambling, its not a problem until you lose. I've never heard of anyone going to Gamblers Anonymous because they won too much in Vegas.

Well now the market crapped out, & even though it has come back somewhat, the government and the average Joes are still looking for a scapegoat. God knows there has to be one for everything. Well, here we are.

Go ahead and continue to take us down, but you're only going to hurt yourselves. What's going to happen when we can't find jobs on the Street anymore? Guess what: We're going to take yours. We get up at 5am & work till 10pm or later. We're used to not getting up to pee when we have a position. We don't take an hour or more for a lunch break. We don't demand a union. We don't retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we'll eat that.

For years teachers and other unionized labor have had us fooled. We were too busy working to notice. Do you really think that we are incapable of teaching 3rd graders and doing landscaping? We're going to take your cushy jobs with tenure and 4 months off a year and whine just like you that we are so-o-o-o underpaid for building the youth of America. Say goodbye to your overtime and double time and a half. I'll be hitting grounders to the high school baseball team for $5k extra a summer, thank you very much. (Note: How many moons are there on this guy's planet?)

So now that we're going to be making $85k a year without upside, Joe Mainstreet is going to have his revenge, right? Wrong! Guess what: we're going to stop buying the new 80k car, we aren't going to leave the 35 percent tip at our business dinners anymore. No more free rides on our backs. We're going to landscape our own back yards, wash our cars with a garden hose in our driveways. Our money was your money. You spent it. When our money dries up, so does yours.

The difference is, you lived off of it, we rejoiced in it. The Obama administration and the Democratic National Committee might get their way and knock us off the top of the pyramid, but it's really going to hurt like hell for them when our fat a**es land directly on the middle class of America and knock them to the bottom. (I would pay to watch that. There are a lot of former customers named 'Bubba' who would like to make your acquaintance.)

We aren't dinosaurs. We are smarter and more vicious than that, and we are going to survive. The question is, now that Obama & his administration are making Joe Mainstreet our food supply…will he? and will they?"

Muni Bonds: Time to Head for Higher Ground?

J. P. Morgan and Charles Schwab have just announced a program to make municipal bonds more available to small investors.

Let's see, record low interest rates and looming risk of default from undisclosed obligations, or perhaps a brisk uptake in inflation. Sounds like a plan (for the big dogs to unload).

Yikes!

Culture of Deceit: Why Dick Fuld So Needlessly and Recklessly Perjured Himself Before Congress

"Truth is not only violated by falsehood; it may be equally outraged by silence."

Henri-Frederic Amiel

Yet another whistle blower who has been completely ignored by the SEC just stepped forward to finally be acknowledged by the media.

A Bloomberg analyst reported around noon NY time that they had verified Mr. Budde's story, and that indeed Dick Fuld easily had received cash in excess of $500 million in compensation for the period in question, higher than even Henry Waxman had asserted in his charts during Dick Fuld's testimony.

Mr. Budde, a former counsel who was frustrated and plain fed up with the culture of personal greed and deceit among the Lehman executives stepped forward again to tell his story after being completely ignored by the SEC and the Lehman Board of Directors.

Now, I have some sympathy for Dick Fuld. I mean, when you are making the big bucks owed to a master of the universe, and you eat widows and orphans for breakfast, what does it really matter if it is $300 million, or $550 million, or even the one billion that some estimate was the true total compensation? What is a few hundred millions when you can afford to wipe your derrière with Cohiba cigars, and gargle with Cristal Brut 1990? (Oh yeah, that's class, real class. I must finally be somebody, and not just some schmuck from the Bronx. I'll show them, show them all.)

I know I have trouble keeping track of what I have exactly in my own wallet at times, especially after paying the kids a couple of quid to walk the dog. And $200 million is hardly a significant sum anymore in the rapidly expanding compensation universe change on Wall Street. There is the locus of Bernanke's inflation, the FIRE sector, where the liquidity has been channeled, for years.

But what interests me most is why did Dick Fuld perjure himself over something to obviously verifiable, and largely irrelevant? Doesn't he file tax returns? Did he mess up using Turbo Tax like other board members of the NY Fed are said to have done? Or was he just a little bit ashamed of taking huge sums from a company that he ran into the ground in a Ponzi scheme? On the other hand Goldman execs celebrate their bonuses and just love to roll in their own irrational greed. Perhaps it was just a slip, a bad habit, a automatic reflex.

Fuld was widely disliked on the Street, and when those sharks and sociopaths, who would sell their own mothers for an eighth, don't like you there just have to be some serious personality issues involved.

But Dick is likely to be just another scapegoat, like Martha Stewart, in an escalating program to feed at first the small fry and now bigger 'outsiders' to the mob and the show trials, while the great bulk of the crime continues to be concealed.

And just so you don't feel too sorry for the Dickster, on November 10, 2008 Fuld sold his Florida mansion to his wife Kathleen for $100; this may protect the house from potential legal actions and judgements against him. They had bought it only 4 years earlier for $13.56 million.

Still, one can only ask the question, and wonder, what a brave new world, that has such people in it, virtually running the regulators, the Congress, and the government for their own irrational benefit and obsessive greed.

Bloomberg
Fuld Understated Pay More Than $200 Million, Lehman’s Budde Says
By James Sterngold
April 30, 2010, 12:02 AM EDT

April 29 (Bloomberg) -- Before Lloyd Blankfein of Goldman Sachs Group Inc. took his place, Richard S. Fuld Jr.’s angry face was the universal symbol of Wall Street greed.

On Oct. 6, 2008, three weeks after Lehman Brothers Holdings Inc. filed the largest bankruptcy in U.S. history, Lehman’s former chief executive officer found himself before Representative Henry A. Waxman, the California Democrat who chaired the House Committee on Oversight and Government Reform. Waxman has stared down plenty of CEOs over the years, yet this had to be one of the most intense confrontations of his career.

“Mr. Fuld will do fine,” Waxman said. “He can walk away from Lehman a wealthy man who earned over $500 million. But taxpayers are left with a $700 billion bill to rescue Wall Street and an economy in crisis.”

Fuld said he was a victim, not an architect, of the collapse, blaming a “crisis of confidence” in the markets for dooming his firm. Reckless management had nothing to do with it. “Lehman Brothers,” he said, “was a casualty.”

Fuld and Waxman went on to disagree about just how much money Fuld had taken out of Lehman before it went under, Bloomberg Businessweek reported in its May 3 edition. Fuld, now 64, said his total compensation from 2000 through 2007 was less than $310 million, not the $485 million that appeared on Waxman’s chart. He said 85 percent of his pay was in Lehman stock that had become worthless. “I never sold my shares,” Fuld said at one point. At another, he said he had not sold the “vast majority” of them.

“That just seems to me an incredible amount of money,” Waxman responded.

Under Oath

Among those closely observing Fuld was a 49-year-old former Lehman lawyer named Oliver Budde who was watching the hearing at home on C-Span. Budde (pronounced Boo-da) was certain Waxman’s figures weren’t too high. They were too low, and he could prove it. Fuld, he believed, had understated the amount he was paid during those years by more than $200 million, and now he had done it under oath, for the entire world to see.

For nine years, Budde had served as an associate general counsel at Lehman. Preparing the public filings on executive compensation had been one of his major responsibilities, and he had been infuriated by what he saw as the firm’s intentional under-representation of how much top executives like Fuld were paid. Budde says he argued with his bosses for years over the matter, so much so that he eventually quit the firm. After he left, he couldn’t let the matter rest.

Contacting Regulators

He contacted the Securities and Exchange Commission and the Lehman board of directors and says neither showed interest in meeting him. He was so shocked by Fuld’s testimony in front of Congress that he started thinking about writing a book going public with his story, which is told here for the first time.

“I wasn’t surprised, because these guys don’t surprise me anymore,” Budde says. “But it just struck me -- they’re doing it again. I wasn’t going to sit back and watch...”

Reykjavík on the Thames: Hard Times Ahead for Britain

"Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity."

W. B. Yeats, The Second Coming

The UK had another debate last night, and the polls shows the Conservatives and the Liberal Democrats in a surprisingly close race, with Labour under Gordon Brown continuing to slip. We will be looking for more polls (not connected in any way to Mr. Rupert Murdoch thank you) over the weekend after yesterday's televised debates.

The election seems likely to result in a 'hung Parliament' with no clear majority for any party, suggesting the possibility of a coalition government.

As a reminder to American readers, most of whom do not even know that the Brits are holding an election or how their governments are formed, the Liberal Democrats would be considered the 'reform party' in this election, what the Yanks would call a 'third party.'

And to put an edge on it, the New Stateman reports that Mervyn King suggests that the coming austerity to be imposed on UK citizens to support the City Banks will ensure that the next party in power will not be elected again for many many years.

Of course that is what the US newspapers said about the Republicans ahead of their last election, but in a short period of time Mr. Obama has managed to alienate a large share of his election base by acting more like a moderate corporate crony than a reform Democrat.

This election is important in any number of ways, but for the US it is a peek into what the future may bring in their own midterm elections in November. It is unusual for a people to go all out for a third party when they are frightened. There has not been a viable third party in the states for almost a century. But the manner in which the elections are settled in the UK brings forward some interesting possibilities.

New Statesman
Mervyn King: next government will be voted out for a generation
30 April 2010

Governor of the Bank of England warns that austerity measures will be so unpopular that the next party in power will not be voted back in.

Mervyn King's comments were revealed just hours before the final leaders' debate.

The American economist David Hale, who has known King for many years, said in an Australian television interview: "I saw the governor of the Bank of England last week when I was in London, and he told me whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be."

The Bank of England declined to comment, but confirmed that King and Hale had had a private meeting in early March.

His comments come amid growing concern that none of the three main parties has been open about the scale of spending cuts and tax rises that will be necessary.

SP Futures Daily Chart: End of Month and the Bulls Need a New High, Badly

Its the end of April, and the bull run on Wall Street needs a new high to break the head and shoulders broadening top that is forming. They seem to have all they can handle to deliver another up month.



They might manage it into the close, but traders are edgy about going long into the weekend with the Greece situation still unsettled. Its probably once again up to the Banks to take it higher, using the government's money.

Just the other week I cautioned a friend on a chatboard I occasionally frequent to watch out for a divergence between gold and equities, with stocks going down while gold holds its ground or rises higher. This is a possible trend change, with the significance that could be quite dramatic in the coming months. At some point there is likely to be a revulsion against fraud, and the paper that supports it. It is unlikely to happen all at once, but in steps, or stages. There are powerful monied interests behind the status quo.

And so here we are, for now.

Guess Who Is Taking Delivery of 1.7 Tonnes of Gold from the Comex

"Never be surprised at the crumbling of an idol or the disclosure of a skeleton.”

John Emerich Lord Acton

Its delivery time for the May Gold contract on the Comex, and the statistics yesterday showed some interesting buying.

Bank of Nova Scotia 'stopped' 699 big contracts, and issued 100 contracts, for a net takedown of roughly 1.7 tons of gold, the bulk of which was supplied by J.P. Morgan.

As you may recall, the Canadian bullion bank Scotia Mocatta is a subsidiary of Bank of Nova Scotia. Socita Mocatta was recently involved in a bit of a scandal when some investors went to visit 'the vault where their gold was stored' and found it to be surprisingly, perhaps shockingly, undersupplied.

Is BNS acting to back up their paper, or are large investors asking for their bullion in advance? Either way, its an act of good faith on the part of BNS to take the delivery, and probably very smart to do it now.

While cash settlement may be an option, it is not ethical, and BNS is known for its high ethical standards towards its customers, unlike some of its more famous American cousins in the gangs of New York.

Nothing to see here, move along. Its all perfectly normal. No one really has to have what they sell and store for you anymore. Unless they are honest.

h/t Denver Dave

When You Lie Down With Them Dept: Morgan Stanley Has 69% Tier 1 Capital Exposure to the PIIGS

That statistic about Morgan Stanley was an eye opener in terms of percent of capital exposure. No wonder Angie Merkel is playing hard to get, holding out for more than another back rub. Morgan Stanley looks like it done slipped in the pig wallow, don'cha know.

Gentlemen, start your presses.

Bloomberg
JPMorgan Has Biggest Exposure to Debt Risks in Europe
By Gavin Finch

April 29 (Bloomberg) -- JPMorgan Chase & Co., the second- biggest U.S. bank by assets, has a larger exposure than any of its peers to Portugal, Italy, Ireland, Greece and Spain, according to Wells Fargo & Co.

JPMorgan’s exposure to the five so-called PIIGS countries is $36.3 billion, equating to 28 percent of the firm’s Tier-1 capital, a measure of financial strength, Wells Fargo analysts including Matthew Burnell wrote today. Morgan Stanley holds $32.4 billion of debt in the region, which equates to 69 percent of its Tier 1 capital, Burnell wrote.

“Regulatory data suggests JPMorgan’s exposure is largest in aggregate, but Morgan Stanley held the largest aggregate exposure to the PIIGS relative to Tier 1 capital,” the analysts wrote. Overall U.S. bank “exposure to Greece is lower than exposure to
Ireland, Italy and Spain.”

Bonds and stocks plunged across Europe in the past week on concern the Greek debt crisis is spreading across the euro area. Standard & Poor’s this week cut Greece, Portugal and Spain’s credit ratings as concern the nations may fail to meet their debt commitments increased.

U.S. banks held a total of $236.8 billion of exposure to the five nations, including $18.1 billion to Greece, Wells Fargo said. European banks have claims totaling $193.1 billion on Greece, according to the Bank for International Settlements, with another $832.2 billion of claims on Spain.

Performance of Several Key Currencies Since January 2007

This chart shows the comparative performance of several currencies in their dollar crosses since January 2007, or shortly before the most recent financial crisis took hold. For the US dollar itself we are using the DX index.



Gold did sell off hard in the market plunge in October of 2008 reaching an intraday low of $680, a buying opportunity of the first order. Many who said they were waiting to buy a dip never bought, because like most speculators they keep waiting for 'THE' bottom, and keep lowering their target buy price, and never really take a position. Then watch it run away from them, and wait for a pullback, but again never buy back in. Oh they will point to certain stocks that performed fabulously off the bottom, but they did not buy and hold them either, except in their fantasies and trash talk.

This is a flip side to those bulls who were long the tech bubble, and kept waiting for a higher price to sell their positions, just a few dollars more, and ended up taking a ride on a death spiral.

If you did not buy in then, what makes you think you can muster the conviction to buy on any other dip in a new major selloff? What makes you think the market will give you a second chance?

Gold never broke in the Crash of 1987, and offered quite a safe haven until Greenspan and the central banks started selling into it in 1988 to discourage the competition. Think they can do that again? With what?



And as for the theory about debt destruction making a currency more valuable, it could work, but don't hold your breath for the euro to strengthen as the sovereign debt of the PIGS starts swirling the bowl. And where they go, so will the UK and then the US go as well.

And before you complacently snicker at the problems in the eurozone, keep in mind that as a percent of GDP, the US debt is fast approaching the same level as Portugal, and climbing.

Release the Kraken: Silver Market Price Rebounds After Sharp Price Drop for Options Expiration

"Corruption is a tree, whose branches are
of an immeasurable length: they spread
Everywhere; and the dew that drops from thence
Hath infected some chairs and stools of authority."

Beaumont and Fletcher, The Honest Man's Fortune

The silver market is rallying strongly today, after the recent dip in price below $18 with respect to the options expiration and delivery dates for the May contract earlier this week. When futures options are filled, one is not paid in cash, but instead they receive active futures contracts at the strike price.

The market game is to either get the front month price below the key strike prices before the expiry to make the options worthless, or to take the price down below the strikes the day after to run the stops of the contract holders. The market makers can see the relative levels of holdings in market in near real time, privileged information not permitted to the average investor.



Three or four banks are short more silver on the COMEX than can easily be attributed to legitimate forward sales or hedging for all the miners in the entire world, for years of production. Granted, it is hard to determine what the truth is because they are allowed to hide their actual positions and collateral, so as to be able to make their leverage and risk difficult to determine. It's the obsessive secrecy for improbable positions and returns that is the tell in most market manipulation and schemes such as Madoff's ponzi investments.

Goldman Sachs was able to obtain the exemptions of a hedger in the markets through contrivance, for the purpose of their proprietary speculation. But if Goldman is the vampire squid, then J. P. Morgan is the kraken of the derivatives markets, having less leverage than the squid as a percentage of assets, but significantly more reach and nominal size, positions which seem almost impossible to manage competently against value at risk in the event of a very modest market dislocation. And of course the risk which a miscalculation presents could shake a continent of counterparties. These oversized positions appear to be integral to the misprision of legitimate price discovery that is at the heart of derivatives frauds in other markets.

The 4Q '09 report from the Office of the Comptroller of the Currency reports that "The notional value of derivatives held by U.S. commercial banks increased $8.5 trillion in the fourth quarter, or 4.2%, to $212.8 trillion." J.P. Morgan alone has a total derivatives exposure that is larger than world GDP. Granted, by far most of these derivatives are based on interest rates, which are largely under the nominal control of Wall Street's creature, the Fed, at least for now.

Here is a description of the derivatives market by Carl Levin that seems appropriate to the current situation, but also to other market dislocations such as that of LTCM which foundered through the misapplication of risk management assumptions to enormously outsized positions.

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

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

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

These bets can be used to overwhelm the clearing price of physical bullion. Further, these bets distort markets, and those markets have an impact on the real commodity supplies and the economy, in the form of artificial oil and energy shortages for example as in the case of Enron. And given enough time these distortions can, through misallocation of resources, capital and labor, create real systemic shortages in key commodities that can take years to remedy, in addition to the short term damage and pain they inflict on countries whose economies rely on commodity exports.

Perhaps Senator Levin can reuse this quote when he questions CFTC Chairman Gary Gensler, another Goldman alumnus in government, and Sandy Weil's protege Jamie Dimon, when the Congress holds hearings on the defaults in the commodity markets and the requested bailouts of the banks who were holding enormously leveraged derivatives positions.

Unless, that is, the bailouts are conducted in secret, as Mr. Gordon Brown may have done for the bullion banks when he sold England's gold for a pittance. It is hard to know the facts of that sale because it has been hidden away by the Official Secrets Act. That type of bailout would be hard to do with silver, since the US has long since depleted its official holdings, and has trouble keeping its own mint in supply. But such a bailout might be done with the gold in Fort Knox and West Point, or the oil in the Strategic Reserve. And cash settlement is always an option, since the Fed does own a printing press.

I know this sounds a bit much at times, and there are plenty who will tell you to ignore it and move along. Tinfoil hat and all that. And it is natural to grow tired of it, to wish it would just go away. I know that I do.

But these things have happened, and continue to happen, and if you do not understand even now how the government and the banks are acting together in the the shadows for the benefit of the monied interests, you have not been following the news. Or perhaps you have, since the mainstream media largely ignores it, and investigates little or nothing, preferring the less expensive route of chairing phony debates between vested insiders, shameless promoters and paid position whores known as 'strategists.' The financial medai seems to have led the way on this, turning their 'news coverage' into an extended infomercial.

It is a dirty, shameful lapse in stewardship, and an overall failure in the upholding of oaths and responsibilities in public figures and officials. I have not seen anything like it since the Watergate trials which seemed to drag on interminably, and the scandalous behaviour and abuses that were exposed in the Nixon Administration. And it has only just begun to come out, but slowly. Because this time the US lacks a truly independent press that respects and investigates the evidence provided by whistle blowers, and is willing to question the sham explanations of the powerful insiders in the government and the financial sector.

And no one in power is recording anything for posterity, at least not voluntarily.

The Economic Policy Error Behind the Stock Market Rally and the Next Phase of the Financial Crisis

"The 20th century has been characterized by three developments of great political importance: The growth of democracy, the growth of corporate power, and the growth of corporate propaganda as a means of protecting corporate power against democracy."

Alex Carey

The strategy of the Bernanke Federal Reserve and of the Obama Administration's economic team is fairly clear: prevent the bank failures of the 1930's by propping up the biggest banks with huge infusions of publicly subsidized capital, and hope that they start lending again as the economy recovers. It is a variation of the 'trickle down' theory of economics adjusted by the perceived Fed policy errors of the first Great Depression, with little from the New Deal programs.

Bernanke is famously a student of the first Great Depression, even as General Joffre, the architect of the Ligne Maginot, was a student of the first World War. And Larry Summers is remarkably similar to Marshal Pétain. Tim, on the other hand, seems to be a student of very little, not even apparently of the tax code which he administers, except perhaps the art of being a manservant, a valet to the powerful.

Failure number one of course is that the banks that they chose to support are not responsible commercial banks engaged primarily in lending to small business and localized activity. Those banks are the local and regional banks that are failing in record numbers. The banks they chose to save are those who have heavily contributed to the campaign coffers and job prospects of Washington politicians. Goldman Sachs, for example, is a glorified hedge fund dedicated to speculation and enormous amounts of leverage. One only has to look at the source of their profits to understand what it is that they do with their capital and energy. And it is largely from 'trading.'

Bernanke has (so he thinks) cleverly tied up much of the liquidity with which he has infused the banks as secure reserves which are paying riskless returns thanks to his innovation in sustaining a floor under the ZIRP by paying interest directly. But if you look at what he is doing, and all Bernanke has done, even in his buying a trillion dollars of bad mortgage debt, he is merely rescuing well-heeled creditors and the banks and hedge funds who engaged in reckless speculation during a housing mania that the Greenspan Federal Reserve had fostered, using the very funds from the people who were most greatly harmed. It is an almost perfect betrayal.

If the Administration and the Congress then succeed in paying for this subsidy to the wealthy by redirecting the Social Security funds which the people have already paid to the government trust fund, by making the case that they already have been expropriated, the betrayal would be complete.

The lack of productive investment and genuine stimulus for the real economy seen so far in the enormous subsidies put forward is appalling. Bernanke and his colleagues Larry Summers and Tim Geithner would have us believe that they had no choice. But informed and experienced commentators such as William K. Black have told us how they have misrepresented their choices.

Their current policies seem to lead the US into a 'zombie economy' at best, in which the Banks are doing well, but almost everyone else suffers from stagflation, particularly the lower and middle classes who obtain their income from productive labor. At worst, the bubble bursts again, and there is another, more furious, leg down, with greater and more lasting damage done to the ordinary people.

So what would have worked? The Fed and Treasury could have backstopped the public instead of the Wall Street banks. They could have temporarily increased and extended the FDIC coverage to much higher levels to guard against further bank runs and depositor losses, and then started dismantling the Wall Street banks through orderly liquidations. What message would this have sent to both savers and speculators? What message has been sent instead?

They could have provided liquidity more directly to the commercial paper markets, rather than trying to shove it through the failing Wall Street banks with much heavier costs and asset support. They needed no new laws or tools to do this. And financial reform and higher taxes on those who obtain outsized wealth without productive work would have curtailed a recurrence.

For example, the Treasury program to forestall mortgage foreclosures has helped in total, since its inception, a total of approximately 167,000 families. This is in a period in which about 200,000 families PER MONTH were losing their homes. And during which time the too big to fail banks were paying out enormous bonuses as though nothing had ever happened to 'retain talent and reward performance,' even while receiving subsidized funds. Its tough love for everyone, from homeowners to wager earners to local banks, except for the ringleaders in Wall Street. And they continue to resist and lobby against even modest reforms, spending millions per day on Washington to buy influence, with your money. This is a banana republic, nothing but crony capitalism.

So why did they do what they did? Are they in league with the banks? Was this some sort of conspiracy? No, I doubt this, although there are far too many secretive aspects to completely dismiss it. And most recently the threat of criminal charges for the NY Fed in their coverup of the AIG bailout by the lone independent investigator, Neil Barofsky, who was appointed by the outgoing presidential administration.

It is important to recall that none of these men have ever held a productive job in the real economy in their entire lives. Even young Tim is no spring chicken at age 48.

They were always the pampered products of the academy, Wall Street, and the government. Even though Mr. Obama has served the community at the street level, he shows none of the tempering of judgement and skills that one perceives in someone who has had to stand their time in the arena of leadership. He is best described as an influencer, an organizer of a timid degree compared to the giants that preceded him in this field. It seems to have been more of a stepping stone to a power base than a calling.

So they took care of their own, the biggest institutions, because that is their weltanschauung, their bias, or view of the world. It has been said that the Federal Reserve is the worst place to locate certain aspects of banking regulation, because they have a complete aversion to ever allowing a bank to fail, as it is a virtual admission of personal failure. It runs against their nature. That is why the FDIC is much more effective in this, as they do not own, or are not owned by, the banks. That is also why placing Consumer Protection Against Banking Abuse is a cruel farce. Couple this with a career experience in which the world is viewed through the lens of cost plus monopoly business management, and privileged power, and their inability to make the tough but effective decisions seems more understandable.

And the promise of future positions, and large amounts of lobbying money to their friends and mentors and sponsors, and the policy error that is ruining the country seems more understandable.

So now we have another asset bubble in the making, a new Ponzi scheme in the US equity market fomented by the Wall Street Banks packed with public funds, seeking to drive prices higher, for the apparent reason of obtaining confidence from the public, but with the effect of selling assets at inflated prices to public institutions yet again, with the inevitable collapse to follow when the reality of their value is discovered. And so the credit crisis will morph into a currency and sovereign debt crisis.

What a shame. What a disappointing performance for a reform government that promised change that the people could believe in.

"...surveys show that the usual investors in major rallies – pension funds, hedge funds and retail investors – have not been net buyers of equities. And he says the most likely explanation for this anomaly in the biggest stock market rally since the 1930s is that major investment banks are the anxious buyers.

“Their buying would appear to be for one of two reasons. Firstly because they think the authorities will prevail in their (so far unsuccessful) efforts to inflate their way out of debt liquidation; or secondly because they are too big to fail and so can afford to take a huge gamble that enough buying will convince others to rush in and buy their inventory of risk assets at even higher prices."

Financial Times, Equity Rally Not Driven by the Usual Investors, Financial Times, April 28

And it should be noted that the Wall Street demimonde, the financial media, the financial commentators regulators and legislators, are widely supportive of this, because they draw they pay and employment prospects from an enlarged financial sector. So they are natural enthusiasts. Similem habent labra lactucam.

And of course there is the mainstream media, which is generally silent, or simply pleads confusion and ignorance, when things financial are discussed out of deference to their corporate owners, and the difficulties of actually engaging in investigative journalism, rather than acting as a guest host to a competitive debate among lobbyists and ideologues. It is the path of least resistance, and greatest returns. And it leads to an economy that consists of little else besides usury, propaganda, and fraud.

"I promise you a new Rome. I promise you a new Empire." Marcus Licinius Crassus, who defeated Spartacus, and helped give rise to the first of the Caesars

Why be negative? Better to be playing safe while Rome burns and the Republic falls.