Sunday, April 11, 2010

Bank Whistleblowers Are Starting To Show Up

It turns out that the 18 largest US Banks have all been using Lehman-esque accounting tricks the last five quarters –

From The Wall Street Journal on Friday –

“Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.”

They lever up and buy Mortgages and other risky assets during the quarter by shorting US Treasuries. Effectively zero interest rates on Treasuries allow these banks to have virtually zero cost in borrowing and shorting them. This allows them to make even larger leveraged bets into risky assets.

Silver Manipulation
It also turns out that several of these same major banks (JPMorgan and HSBC) allegedly have been manipulating the price of Gold and Silver to stabilize the value of the US Dollar, while the Fed is printing Trillions new Dollars to try and prop up the prices of risky assets. Gold is the enemy of a money-printing central bank.

"JPMorgan acts as an agent for the Federal Reserve; they act to halt the rise of gold and silver against the US dollar. JPMorgan is insulated from potential losses [on their short positions] by the Fed and/or the US taxpayer," Maguire said.

"HSBC conducts an ongoing manipulative concentrated naked short position in gold. Silver is much easier to manipulate due to its much smaller [market] size," Maguire added.

These banks take short positions to hold down price and if price goes up, then the Fed makes them whole!

“Also during the CFTC hearing, Jeff Christian, founder of the commodities firm CPM Group, said that the LBMA, the physical delivery market for gold and silver in the UK, has been using leverage, which is another way to depress the price of gold and silver.

Christian said that the LBMA -- the same market Maguire trades in -- has leverage of about 100-1 on the gold bars settled on the exchange. In layman's terms, that means if 100 clients requested their bullion bars be delivered, the exchange could only give one client the precious metal.”

“Back in 2007, Morgan Stanley agreed to settle a $4.4-million lawsuit brought by precious-metal clients, who alleged that Morgan offered to buy gold and silver and store it for the investors, but never purchased any metal and still charged them storage fees.”

So these banks “sell” gold to clients, but only have to have 1% of the gold available to deliver to clients. They then charge a “storage fee” for storing this 99% of the Gold purchased, which never existed in the first place!

How about if they only had to buy 1% of the shares of Microsoft that clients bought? What if 99% of the purchase orders in Microsoft never went to market, do you think that would have an impact on the price of Microsoft? If sure would affect demand and by definition, keep the price of Microsoft down.

“According to the e-mails Maguire sent to CFTC regulators, he was spot-on in his expectations of how the precious metals would trade on release of the January jobs report.

This message is to "confirm that the silver manipulation was a great success and played out exactly to plan as predicted yesterday. How would this be possible if the silver market was not in the full control of the parties we discussed in our phone interview," Maguire wrote to a staff investigator after the trading day.”

Insiders understand what is going on. For his troubles, Mr. Maguire and his wife were nearly killed by a hit and run driver, two days after the emails were made public.

The bottom line is that everybody knows the markets are rigged. But rigged bubbles can go on for a long time – the old “the markets can stay irrational longer than you can stay solvent…”

From my consultant over the weekend –

“Since 2/23/10 the SPX hasn`t had a pullback of 1.0%, and the last time that happened was over 3 years ago. It is not the rate of advance on light volume that stands out, but it is the persistence of advance which is very unusual.

I could only think of the PPT [plunge protection team] after I read the article in the NY Post today “Trader blows whistle on gold and silver price manipulation” It outlines how the major banks do the Federal Reserve’s bidding in the metals markets to keep the prices of gold and silver down versus the US Dollar. The whistle blower, who is a former GS trader, explained how JPM is stopped out by the Fed for any losses during the intervention tactics. The article also mentions the HSBC bank involvement, but the article also indicates that “They” are trying to shut this whistle blower down. So I ask you, is there a PPT team or not in the equity market, and the answer is definitely yes.

The volatility has collapsed despite the persistence major index advance, but we have another earnings season on tap, and interest rates are pushing new Break Out highs despite the Fed jawboning about keeping rates low for an extended period of time, so the trading volatility should increase. It is also tax selling season, and with Obama`s proposed tax hikes that should generate some volatility.

Keep grinding, for the volatility shall return!”

You can’t predict the future, but SPX in the 1,229 – 1,250 range (maybe as high as 1,300) is a logical place for a meaningful reversal.

Commodities are late stage movers, and they are starting to work. That goes for Commodity-based economies and currencies too.