Monday, March 30, 2009

Something MORE Wicked This Way Comes

"At the end of the day, upon what rock does the world financial system rest? Ah...that’s the weakness of it...there ain’t no rock. Look at the foundation of the world’s money system and all you find is mush..."
-Bill Bonner, The Daily Reckoning

Once again I will refrain from commenting on today's "price" of Gold, and market action. It is a joke! Gold should be far north of $1000. It is a complete waste of time and energy discussing the "current CRIMEX price" of Gold. It is, quite frankly, irrelevant. The real price of Gold is the price being paid by investors for actual bullion. The large premiums asked for, and received, to take physical Gold from the market are warranted and more "representative" of the REAL price of Gold.

What goes on in the Precious Metals markets each and every day in New York is a government sanctioned crime. It is amusing to believe that this country was once looked up to for its Free Markets, it's insistence to uphold the truth, and it's commitment to justice. Yeah well, we wouldn't be in this Global Financial Crisis if any of those beliefs were still true...

Today's Truth Follows:

What Asia and the world need from America now
What the American governing and legal establishment must do, before too much time goes by, is to come completely clean not only with the American people but with Asia, especially, which has poured so much of its wealth into the US China and Japan are its biggest financial investors.

Everyone needs to know what really happened and who should be held accountable for the raw criminality behind the scenes.

The US needs to come clean by devising a wide-ranging - but fair -- criminal investigation of hedge-fund leaders and managers, derivatives sales groups and their allies, and of course any and all Ponzi-schemers that have defrauded people of their life savings. We don't need a visceral witch-hunt; we require fair and honest accounting.

What's at stake is not so much an eventual honest return on investments (which, in many instances, may be impossible, as many funds have vaporized down the rat-holes of criminal enterprises), but the credibility of the United States of America. And this is something that, when healthy, is priceless, and when destroyed, is worthless.

America, which has often and loudly described itself as a "nation of laws, not men *or women*," now needs to demonstrate for the world what that phrase represents. Criminal conspirators like members of the Mafia know what the lash of our law can mean.

Now, white-collar criminals who operated out of Wall Street corporate suites or off-shore in sunny foreign lands need to be brought into the stationhouse of American justice, read their rights, and be permitted one cell-phone call to their lawyer, before their fancy cell-phone is impounded, pending trial, along with all other illegal fruits of criminal profit.

We recall that when Chinese exporters were caught peddling toxic pet-food and eggs and so on, the uproar from the West was angry and overwhelming.

This is as it should be. The anger in Asia may be more muted (because, as a broad generality, Asians tend to be more polite). But the fury, however muffled, is palpable. What's more, judging from recent events in the US - such as more bonuses for AIG executives - this fury is unlikely to wane soon and may even attain new, bereaved heights.

The anger is stoked not only because of money lost but memories still fresh. One unforgettable example: American Treasury officials lecturing Asia about the need for national and corporate transparency. Who can forget, during the Clinton years, then- Treasury Secretary Robert Rubin and his sanctimonious, holier-than-thou very public sermons to the Japanese about what they were doing wrong?

Another example: the thunderous editorial condemnations on the editorial pages of the Pravda of US capitalism - the Wall Street Journal - of central government intervention when markets are in crisis. Who's crying now? Remember the wholesale Western opprobrium that met Hong Kong authorities in 1998 when they sought to firm up their speculation-battered equity and future markets by buying up troubled H.K. stocks? But what is Washington doing today? Right, exactly that!

It is against that past backdrop of a kind of "abstinence" lecture series by US officials, in particular, that people want a measure of honest moral reckoning now.

Pirates of the Comex[MUST READ]
By: Adrian Douglas
In September of 2008 the CFTC launched an investigation of the COMEX silver market on concerns that it is manipulated. This is being spearheaded by the Enforcement Division. They also undertook to investigate the gold market too. This is the third publicly announced investigation into manipulation of the silver market. The two prior investigations failed to uncover any evidence of manipulation of the silver market. The current investigation has been running for 6 months and according to Commissioner Bart Chilton it is making progress, whatever that might mean. The apparent lack of urgency and an investigation moving at the speed of molasses means that every day mining companies struggle for survival and investors struggle to remain invested, and traders and investors in precious metals are robbed by the Pirates of the COMEX. It is an outrage.

For those of us who observe these markets in real time the signs of manipulation are obvious. If you drive a car everyday you will notice even the slightest vibration or change in engine noise that will alert you that something is not right. To apply the same analogy at the COMEX, somebody has stolen the wheels but after 6 months of looking it doesn’t appear that the expert mechanics have spotted the cause of the excessive vibration!

...from July to November 2008 three US Banks went from having approximately no net short at all to having 67% of the total commercial net short position! The correlation with price is evident. It further appears that they drove the price up from the end of 2007 only to hammer it down in July of 2008. The indisputable conclusion is that these three banks dominated the market to the extent they represented two thirds of the entire net short position of the commercials and as such they controlled the price of gold which is illegal. Furthermore, the amount of contracts that were sold short to achieve this represented 10% of the annual global gold mine production! Could there be any clearer sign of manipulation?

It is a sterile discussion to contemplate whether these banks had this amount of gold or silver to sell. It is irrelevant! Commodity Law does not allow anyone to manipulate the direction of markets even if they have the means to do so…this is exactly why the law exists because otherwise the people with lots of money or lots of gold and silver would always be able to defraud all the small investors. But this is exactly what goes on every day on the COMEX right under the noses of the regulators.

Who are these Pirates of the COMEX? The names of the banks whose positions appear in the CFTC report are not made public. But we can find out who they are. There is another report which issued by the treasury which is the “Bank Derivatives Activities Report” compiled by the Office of the Comptroller of the Currency. In this report they list the top five banks by name who own the most OTC derivatives in the categories of gold derivatives and precious metals derivatives. The report does not spell out what is meant by “Precious Metals” but it excludes gold so we can be fairly sure it is mainly derivatives based on silver, although there are probably some platinum and palladium contracts also.

When the derivative positions of the banks are examined it becomes clear that JPMorganChase and HSBC together dominate the market. It can be seen that with the exception of Q2 and Q3 of 2007 these two banks hold 85-100% of the banking sector derivatives for precious metals which I suspect is mainly silver.

Good grief! The notional value of these derivative holding with maturity of less than 1 year were averaging 10.8 B$ in 2007 and leaped to an average of 15.8B$ in the first three quarters of 2008. All the silver mined in the world each year is only worth 8.8B$ at $13/oz.

So we see two banks holding an outrageously dominant market share position in these instruments of an outrageously large nominal dollar value in 2007 which then jumps to a nominal value that is 40% more outrageously large in the first three quarters of 2008!

Now as the credit markets started to show signs of serious trouble at the end of 2007 and early 2008 one would imagine that customers of JPM and HSBC would want to buy “call” type derivative contracts such that they would be bets that precious metals were going to go higher.

What we have observed is that two unknown banks fraudulently manipulated the COMEX silver market in 2008 with an outrageous 99% ownership of the entire Commercial Net Short position which resulted in the price of silver crashing from $20/oz down to less than $9/oz. That is a real coincidence that two banks on the hook for the equivalent of 140% of all the silver mined in one year in notional value of derivatives should suddenly get lucky that the silver price plummeted such that all those unlucky derivatives customers didn’t get to cash in their calls! Coincidences like this don’t happen. From Q3 to Q4 2008 JPM and HSBC managed to reduce their derivatives in precious metals by 6.6B$ or 43%. This provides a very good reason why two banks in the middle of 2008 suddenly decided they were going to break commodity law by gaining a concentration that represented 100% of the commercial net short of the COMEX market. The most likely reason is these two banks who have manipulated the COMEX market so blatantly are the same two banks who own a monstrous oversized and unregulated derivative position which needed to be reduced.

In the first three quarters of 2008 the notional value of the gold derivatives held by these two banks leaped to an average of 85 B$. As with silver it is highly likely that the increase in business would have been dominated by “call” type contracts as the world’s financial system started to go into meltdown. Interestingly we earlier noted that in mid 2008 three US banks had increased their net short position in gold on the COMEX from almost zero to 67% of the commercial net short position and to do so they sold short the equivalent of 10% of the world’s annual gold production in short contracts. Is this another coincidence? I would strongly suspect that positions acquired by the three banks were mainly driven by the positions of only two of them and those two banks are highly likely to be JPMorganChase and HSBC. From Q3 to Q4 2008 JPM and HSBC managed to reduce their derivatives in gold by 22.4B$ or 18%. The combined reduction in gold and precious metals derivatives notional value of 29B$ achieved in a 3 month period is enough to buy 54% of all the gold and silver mined in the world in one year!

These are not the only examples of manipulation of the COMEX gold and silver markets, it happens with other commercials on a daily basis, but this Pirate attack instigated in July of 2008 has them in clear view of everyone, sailing past disgruntled and downtrodden precious metals investors with their Jolly Roger flag flying for all to see….well, for all to see except for the Enforcement Division of the CFTC because apparently after 6 months no one over there has spotted them.

As another amazing coincidence JPMorganChase is the custodian of the silver that is supposedly purchased on behalf of SLV Exchange Traded Fund investors, and HSBC is the custodian of the gold that is supposedly purchased on behalf of GLD Exchange Traded Fund investors. Yet these two banks are seen recklessly gambling more gold and silver paper promises in an unregulated market than they could ever get their hands on. Those are truly bizarre credentials to be in charge of the safe keeping of other people’s precious metals!

Is there any gold inside Fort Knox, the world's most secure vault?
For several prominent investors and at least one senior US congressman it is not the security of the facility in Kentucky that is a cause of concern: it is the matter of how much gold remains stored there - and who owns it.

They are worried that no independent auditors appear to have had access to the reported $137 billion (£96 billion) stockpile of brick-shaped gold bars in Fort Knox since the era of President Eisenhower. After the risky trading activities at supposedly safe institutions such as AIG they want to be reassured that the gold reserves are still the exclusive property of the US and have not been used to fund risky transactions.

In other words, they want to be certain that the bullion has not been rendered as valueless as if a real-life Goldfinger had stolen it.

“It has been several decades since the gold in Fort Knox was independently audited or properly accounted for,” said Ron Paul, the Texas Congressman and former Republican presidential candidate, in an e-mail interview with The Times. “The American people deserve to know the truth.”

Mr Paul has so far attracted 21 co-sponsors for a Bill to conduct an independent audit of the Federal Reserve System - including its claims to Fort Knox gold - but an organisation named the Gold Anti-Trust Action Committee (GATA) is taking a different approach.

It has hired the Virginia law firm William J.Olson, PC, to test President Obama's promise to bring “an unprecedented level of openness” to the Government and next month it will file several Freedom of Information requests for a full disclosure of US gold ownership and trading activities.

“We're taking the President at his word,” said Chris Powell, of GATA. “If you go online you can find out how to build a nuclear weapon but you won't find any detailed records on central gold reserves.”

Geithner’s ‘Dirty Little Secret’[must read]
By: F. William Engdahl
The ‘dirty little secret’ which Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks which are the source of the toxic poison that is causing such dislocation in the world financial system. What Geithner is desperately trying to protect is that reality. The heart of the present problem and the reason ordinary loan losses as in prior bank crises are not the problem, is a variety of exotic financial derivatives, most especially so-called Credit Default Swaps.

In 2000 the Clinton Administration then-Treasury Secretary was a man named Larry Summers. Summers had just been promoted from No. 2 under Wall Street Goldman Sachs banker Robert Rubin to be No. 1 when Rubin left Washington to take up the post of Vice Chairman of Citigroup. As I describe in detail in my new book, Power of Money: The Rise and Fall of the American Century, to be released this summer, Summers convinced President Bill Clinton to sign several Republican bills into law which opened the floodgates for banks to abuse their powers. The fact that the Wall Street big banks spent some $5 billion in lobbying for these changes after 1998 was likely not lost on Clinton.

One significant law was the repeal of the 1933 Depression-era Glass-Steagall Act that prohibited mergers of commercial banks, insurance companies and brokerage firms like Merrill Lynch or Goldman Sachs. A second law backed by Treasury Secretary Summers in 2000 was an obscure but deadly important Commodity Futures Modernization Act of 2000. That law prevented the responsible US Government regulatory agency, Commodity Futures Trading Corporation (CFTC), from having any oversight over the trading of financial derivatives. The new CFMA law stipulated that so-called Over-the-Counter (OTC) derivatives like Credit Default Swaps, such as those involved in the AIG insurance disaster, (which investor Warren Buffett once called ‘weapons of mass financial destruction’), be free from Government regulation.

At the time Summers was busy opening the floodgates of financial abuse for the Wall Street Money Trust, his assistant was none other than Tim Geithner, the man who today is US Treasury Secretary. Today, Geithner’s old boss, Larry Summers, is President Obama’s chief economic adviser, as head of the White House Economic Council. To have Geithner and Summers responsible for cleaning up the financial mess is tantamount to putting the proverbial fox in to guard the henhouse.

What Geithner does not want the public to understand, his ‘dirty little secret’ is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global ‘off-balance sheet’ or Over-The-Counter derivatives issuance.

Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.

The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere’ $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain’s HSBC Bank USA has $3.7 trillion.

After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Just to underscore the magnitude, trillion is written 1,000,000,000,000. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.

The Government bailouts of AIG to over $180 billion to date has primarily gone to pay off AIG’s Credit Default Swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase, Bank of America, the banks who believe they are ‘too big to fail.’ In effect, these five institutions today believe they are so large that they can dictate the policy of the Federal Government. Some have called it a bankers’ coup d’etat. It definitely is not healthy.

“The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”
-Ben Bernanke, said in 2006

The Quiet Coup[MUST READ]
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

Alarming News: Bank Losses Spreading!
by Martin D. Weiss, Ph.D.
Until the third quarter of last year, the banks' losses in derivatives were almost entirely confined to credit default swaps — bets on failing companies and sinking investments.

But credit default swaps are actually a much smaller sector, representing only 7.8 percent of the total derivatives market.

Now, with these new losses in interest rate derivatives, the disease has begun to infect a sector that encompasses a whopping 82 percent of the derivatives market.2

Thus, considering their far larger volume, any threat to interest rate derivatives could be far more serious than anything we've seen so far.

The large banks are exposed to the danger that buyers will vanish, markets will suddenly become illiquid, and they'll be unable to unload their positions without accepting wipe-out losses. Has this ever happened? Unfortunately, yes. In fact, it's the primary reason they lost a record $3.4 billion in the last three months of 2008.

The large banks are exposed to the danger that, with exploding federal deficits and new fears of inflation, interest rates will suddenly surge, delivering a whole new round of even bigger losses in the months ahead.

Worst of all, the five biggest banks are exposed to breathtaking default risk — the danger that their trading partners could fail to make good on their gambling debts, transforming even the best winning trades into some of the worst losers.

Specifically, at year-end 2008,

-Bank of America's total credit exposure to derivatives was 179 percent of its risk-based capital;

-Citibank's was 278 percent;

-JPMorgan Chase's, 382 percent; and

-HSBC America's, 550 percent.

What’s excessive? The banking regulators won’t tell us. But as a rule, exposure of more than 25 percent in any one major risk area is too much, in my view.

And if you think these four banks are overexposed, wait till you see the super-high roller that the OCC has just added to its quarterly reports: Goldman Sachs.

According to the OCC, Goldman Sachs’ total credit exposure at year-end was 1,056 percent, or over ten times more than its capital.

Global Meltdown Part 3
By James West
This is the point at which the global economy falls the rest of the way off of the cliff. The false hope raised by the illusion of decisive action on the part of the Obama administration is giving way to Democratic party in-fighting and an increasing public perception that Obama and Geithner are out of their league.

A number of events on the macro economic and political fronts threaten to converge simultaneously to force another major contraction in global markets.

They are:

-Auto industry’s impending contraction as a result of imminent bankruptcies and mergers;

-Hold-up of stimulus money in the U.S. Congress as squabbling and criticism over the proposed budget and regulatory reforms bog down progress;

-Increasing public outrage over the role hedge funds have played in forcing Bear Stearns and Lehman Brothers into bankruptcy, and the apparent collusion between hedge funds and the Securities Exchange Commission is undermining confidence in both the Obama administration and the S.E.C.

-China’s growing agitation for an alternative to the U.S. Dollar as default foreign reserve currency will continue to put downward pressure on the U.S. Dollar and help undermine treasury auctions;

-Disastrous corporate earnings (7th straight quarter of declines, this time upwards of 35 percent), bankruptcies, and layoffs continue to destroy economic health at the street level;

-The upcoming G20 meeting in London, England will likely result in the failure of all nations to agree on anything on a unified basis, which will trigger major market declines in the weeks to follow.

Investors should get out of equities and bonds and into precious metals or cash (not U.S.!) exclusively.

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