Guest Post: Grading Alan Greenspan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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


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

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

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

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

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

The Maestro and the Hundred-Year Flood

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

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

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

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

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

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

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

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

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

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

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

‘Sufficient Evidence’

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

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

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

CDR Fights Case

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

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

‘Absolute Disaster’

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

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

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

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

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

October Indictments

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

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

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

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

Read the rest of the story here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HEARINGS ON THE METALS MARKETS, MARCH 25, 2010

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

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

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

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

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

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

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

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

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

-END-

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

Dear Mr. Ramirez:

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

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

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

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

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

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

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

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

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

Kind regards,
Andrew Maguire

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

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