- Begin Excerpt
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- While the rest of the financial world struggles, it might
seem strange that four of the largest US banks have made record profits
this past quarter--and not just on average, but every single trading day.
Too good to be true? Indeed. No one can do this consistently unless they
are part of the special group of insiders that are allowed access to market
information at the exchanges that no one else has. In fact, normal people
get sent to jail for trading on inside information, but not these guys.
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- They are even able to execute trades after hours. Even
during regular exchange hours they are given priority to execute trades
based on foreknowledge of what others are about to do, which allows them
to go short or long in the markets to take advantage of known future trading
volumes. With access to almost unlimited low or zero interest money from
the FED, or using naked shorts (illegal for others) and naked hedges they
can also drive the markets in either direction and profit from those predictable
moves. The financial world is starting to wake up to this rigged system,
but can do nothing about it. The manipulators collude with high level regulators,
the Treasury and the FED. It is also doubtful that a controlled Congress
and judiciary will do anything to stop it. Predictably, even the new Supreme
Court nominee, Elena Kagan, has a history of playing along with establishment
powers, both financial and political. That's why she is being groomed for
the high court.
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- Addressing the growing outrage. Jonathan Weil of Bloomberg
comments on the obscene profits the big banks are reaping from this rigged
system: "Score another triumph for the rigged- market theory. In a
feat that would seem to defy the odds, Goldman Sachs, JPMorgan Chase and
Bank of America this week each said its trading desk made money every day
of the first quarter. Goldman said its daily net trading revenue topped
$100 million 35 times last quarter out of 63 trading days. JPMorgan and
Bank of America disclosed similar eye-popping stats. Citigroup, too, recorded
a profit on each trading day, Bloomberg News reported, citing unnamed people
who knew the results.
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- "The intrigue is high. If a too-big-to-fail bank's
traders were able to make money every day of a quarter, were they really
trading in any normal sense of the word? Or would vacuuming be a more accurate
term? What kinds of risks do such incredible profits entail, for the banks
and the rest of us taxpayers? [no risks at all] And are results such as
these too good to be true? There seems to be no satisfying way to answer
those questions, or even the more basic inquiry: How exactly do these banks'
trading divisions make money? Reading the companies' impenetrable financial
reports is of little help. However they did it, the data suggest it was
as easy last quarter as hitting the side of a barn with a baseball from
three feet away. This isn't the way 'trading' works in the real world.
A simple exercise in measuring probabilities is instructive here.
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- Cliff Kincaid covered how last week's 1000 point drop
in the stock market was manipulated. "The major media say the chaos
on Wall Street was the result of a 'trader error, possibly a typo,' as
the Washington Post put it. Some reports claim the culprit was a 'fat finger'
on a computer somewhere that pressed the wrong key. But Zubi Diamond, author
of the Wizards of Wall Street, says these claims are all lies. 'What happened
in the market on Thursday is a typical example of pure market manipulation'
by unregulated hedge fund short sellers.
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- "His book warns that the same hedge fund short sellers
were behind the financial crash of 2008 that paved the way for Obama's
election to the presidency [that conspiracy was owing to powers even higher
than money]. Diamond says the historic market plunge on Thursday was 'due
to computerized hedge fund short selling because there is no protection
for the invested capital in the equity markets. There is no uptick rule,
no circuit breakers [actually there are some, but they are so mechanical
and predictable that they are easily circumvented] and no trading curbs.
Our market is primed for manipulation.' Diamond is referring to financial
regulations, which have been repealed, designed to prevent market manipulation.
Diamond has been adamant in his view that the financial reform bill being
pushed by Obama and liberal Democrats on Capitol Hill will do nothing to
solve this problem and regulate the hedge fund short sellers.' No one will
come on TV to tell the truth,' he complained. Instead, he says representatives
and apologists for the hedge fund short sellers, who operate as the Managed
Funds Association(MFA), 'go on TV and provide false explanations of what
happened.'
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- "Diamond says that the repeal of the safeguard regulations,
such as the uptick rule, circuit breakers and trading curbs, and the introduction
of the short ETFs (Exchange traded funds), which began under Christopher
Cox at the Securities and Exchange Commission, has given the members of
the MFA tremendous power and influence. He says these individuals include
George Soros, John Paulson, Jim Chanos, James Simon, and other hedge fund
short sellers, including those who operate Quant Funds and engage in computerized
trading. 'They have the ability to manipulate U.S. and some international
markets,' he says. Indeed, Diamond maintains that the MFA has basically
taken control of the U.S. stock market.
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- "'The only financial reform needed today is to regulate
and monitor the hedge funds and the hedge fund short sellers, some of them
which are registered off-shore to avoid scrutiny. These global operators,
with investors who remain mostly anonymous, must be compelled to register
with the Securities and Exchange Commission (SEC), publicly disclose their
positions in the markets, and maintain accounting and trading records for
a period of 10 years so their activities can be monitored and scrutinized.
Just like mutual funds, they must be prohibited from engaging in day trading
activities.'
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- "'What happened on Thursday happens to a select
group of individual stocks on a daily basis as the hedge fund short sellers
prey on common investors,' he asserted. 'They are now expanding the manipulation
to include the whole market. They can now crash the market, panic shareholders
out of their stocks, buy to cover their short positions for hefty shorting
profits, and then buy back in at the bottom to open long positions and
then recover the whole market (indexes) to normal levels.' These market
manipulators, he notes, have the ability to drive prices down and then
drive them back up, all within a 15 minute period. 'How's that for no-risk
investing?' he says. 'They make money through stock price volatility and
market volatility. They manipulate stock prices through unrestricted short
selling.'"
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- ZeroHedge.com explains through Jim Rickards why derivatives
and naked shorts are such a danger: "Jim Rickards, who recently has
gotten massive media exposure on everything from the JPM Silver manipulation
scandal, to the Greek default, was back on CNBC earlier with one of the
most fascinating insights we have yet heard from anyone, which demonstrates
beyond a doubt why any attempt by Europe to print its way out of its current
default is doomed:
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- "'Look at what Soros did to the Bank of England
in 1992 - he went after them, they had a finite amount of dollars, he was
selling sterling and taking the dollars, and they were buying the sterling
and selling the dollars to defend the peg. All he had to do was sell more
than they had and he wins. But he needed real money to do that. Today you
can break a country, you don't need money you just need synthetic euro
shorts or CDS [which don't require any real money to execute]. Goldman
can create 10 trillion of euro shorts. So it just dominates whatever governments
can do. So basically Goldman can create shorts faster than Europe can create
money.' Just wait until Europe finally realizes that the CDS 'speculators'
had all the cards in the poker game all along [having foreknowledge of
what the EU Central bank and the IMF were going to do relative to Greek
debt]. And we hope Europe listens to the man."
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- HOW SHORTING THE MARKET WAS MADE SIMPLE BY CDS
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- Financial analyst James Quinn did everyone a great service
this week in his exposition on how market shorts were facilitated by Credit
Default Swap derivatives. Here are some excerpts: "By the time Greg
Lippmann, the head sub-prime guy at Deutsche Bank, turned up in the FrontPoint
conference room, in February 2006, Steve Eisman knew enough about
the bond market to be wary. Lippmann's aim was to sell Eisman on what he
claimed was his own original brilliant idea for betting against -- or short
selling -- the sub-prime mortgage bond market. Eisman didn't understand.
Lippmann wasn't even a bond salesman; he was a bond trader: 'In my entire
life, I never saw a sell-side guy come in and say, 'Short my market.' But
Lippmann made his case with a long and involved presentation: over the
last three years, housing prices had risen far more rapidly than they had
over the previous 30; they had not yet fallen but they had ceased to rise;
even so, the loans against them were now going sour in their first year
at amazing rates.
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- "He showed Eisman this little chart that illustrated
an astonishing fact: since 2000, people whose homes had risen in value
between 1% and 5% were nearly four times more likely to default on their
home loans than people whose homes had risen in value more than 10%. Millions
of Americans had no ability to repay their mortgages unless their houses
rose dramatically in value, which enabled them to borrow even more. That
was the pitch in a nutshell: home prices didn't even need to fall; they
merely needed to stop rising at the unprecedented rates they had been for
vast numbers of Americans to default on their home loans.
-
- "Lippmann's presentation was just a fancy way to
describe the idea of betting against US home loans: buying credit default
swaps on the worst sub-prime mortgage bonds. The beauty of the credit default
swap, or CDS, was that itsolved the timing problem. Eisman no longer needed
to guess exactly when the sub-prime mortgage market would crash. It also
allowed him to make the bet without laying down cash up front, and put
him in a position to win many times the sums he could possibly lose. Worst
case: insolvent Americans somehow paid off their sub-prime mortgage loans,
and you were stuck paying an insurance premium of roughly 2% a year for
as long as six years -- the longest expected life span of the putatively
30-year loans.
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- "Later, whenever Eisman set out to explain to others
the origins of the financial crisis, he would start with what he learned
in Las Vegas. He'd draw a picture of several towers of debt. The first
tower was the original sub-prime loans that had been piled together. At
the top of this tower was the safest triple-A rated tranche, just below
it the double-A tranche, and so on down to the riskiest, triple-B tranche
-- the bonds Eisman had bet against. The Wall Street firms had taken these
triple-B tranches -- the worst of the worst -- to build yet another tower
of bonds: a collateralized debt obligation (CDO). Like the credit default
swap, the CDO had been invented to redistribute the risk of corporate and
government bond defaults, and was now being rejigged to disguise the risk
of sub-prime mortgage loans.
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- "It was in Vegas that Eisman finally understood
the madness of the machine. He'd been making these side bets with major
investment banks on the fate of the triple-B tranche of sub-prime mortgage-backed
bonds without fully understanding why those firms were so eager to accept
them. Now he got it: the credit default swaps, filtered through the CDOs,
were being used to replicate bonds backed by actual home loans. There weren't
enough Americans with [bad] credit taking out loans to satisfy investors'
appetite for the end product. Wall Street needed his bets in order to synthesize
more of them. 'They weren't satisfied getting lots of unqualified borrowers
to borrow money to buy a house they couldn't afford,' Eisman says. 'They
were creating them out of whole cloth. One hundred times over! That's why
the losses in the financial system are so much greater than just the sub-prime
loans. That's when I realized they needed us to keep the machine running.
I was like, This is allowed?'
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- "What he [Eisman] underestimated was the total unabashed
complicity of the upper class of American capitalism. For instance, he
knew that the big Wall Street investment banks took huge piles of loans
that in and of themselves might be rated BBB, threw them into a trust,
carved the trust into tranches, and wound up with 60 percent of the new
total being rated AAA. But he couldn't figure out exactly how the rating
agencies justified turning BBB loans into AAA-rated bonds. 'I didn't understand
how they were turning all this garbage into gold,' he says. He brought
some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over
for a visit. 'We always asked the same question,' says Eisman. 'Where are
the rating agencies in all of this? And I'd always get the same reaction.
It was a smirk.' He called Standard & Poor's and asked what would happen
to default rates if real estate prices fell. The man at S&P couldn't
say; its model for home prices had no ability to accept a negative number.
'They were just assuming home prices would keep going up,'
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- "Steve Eisman had virtually no respect for the large
Wall Street firms, particularly Merrill Lynch. 'There is going to be a
calamity, and whenever there is a calamity, Merrill is there.' When it
came time to bankrupt Orange County with bad advice, Merrill was there.
When the internet went bust, Merrill was there. Way back in the 1980s,
when the first bond trader was let off his leash and lost hundreds of millions
of dollars, Merrill was there to take the hit. That was Eisman's logic----the
logic of Wall Street's pecking order. Goldman Sachs was the big kid who
ran the games in this neighborhood. Merrill Lynch was the little fat kid
assigned the least pleasant roles, just happy to be a part of things. The
game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had
taken its assigned place at the end of the chain.
-
- "Wall Street became greedier, nastier, more corrupt,
more arrogant and more incompetent. He traced the biggest financial disaster
in history back to his old boss John Gutfreund. His decision to convert
Salomon Brothers from a private partnership to a public corporation opened
Pandora's Box. The other Wall Street partnerships followed like lemmings.
The risk of failure was shifted from the partners to the shareholders and
the citizens of the United States. Lewis details this fateful decision:
From that moment, though, the Wall Street firm became a black box. The
shareholders who financed the risks had no real understanding of what the
risk takers were doing, and as the risk-taking grew ever more complex,
their understanding diminished.
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- The moment Salomon Brothers demonstrated the potential
gains to be had by the investment bank as public corporation, the psychological
foundations of Wall Street shifted from trust to blind faith. No investment
bank owned by its employees would have levered itself 35 to 1 or bought
and held $50 billion in mezzanine C.D.O.'s. I doubt any partnership would
have sought to game the rating agencies or leap into bed with loan sharks
or even allow mezzanine C.D.O.'s to be sold to its customers. The hoped-for
short-term gain would not have justified the long-term hit.
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- "This decision unhinged the concept of risk from
the concept of return. Compensation was no longer tied to long term profits
and success. Clients were no longer the customer. They were just fee generating
suckers. Wall Street kept all the profits, took ungodly risks, lost trillions
and got bailed out by Main Street. The poker game continues, as these criminals
are again paying themselves billions in bonuses at the expense of Main
Street. Michael Lewis completes the 20 year circle of greed with his brilliant
book:'
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- The people in a position to resolve the financial crisis
were, of course, the very same people who had failed to foresee it. All
shared a distinction: they had proven far less capable of grasping basic
truths in the heart of the U.S. financial system than a one-eyed money
manager with Asperger's syndrome... The world's most powerful and most
highly paid financiers had been entirely discredited; without government
intervention every single one of them would have lost his job; and yet
these same financiers were using the government to enrich themselves.'"
Now, that's a powerful indictment!
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- End Excerpt
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- Copyright Joel Skousen. Partial quotations with attribution
permitted.
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- Cite source as Joel Skousen's World Affairs Brief http://www.worldaffairsbrief.com
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- World Affairs Brief, 290 West 580 South, Orem, Ut 84058,
USA
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