Saturday, December 13, 2008

Deregulation: Catalyst to a Crash

California is on the verge of bankruptcy. If the U.S. auto bailout doesn’t get people talking about the dangers of deregulation, maybe California will. There’s only so much bailout money to go around. Take a guess why Congress is stalling on GM and Ford. Despite Congressional leaders saying they are not playing a wait-and-see numbers game. That is exactly what they are doing.

Today we are seeing the outcome of a long battle in economic ideology. This story will be in two parts. The first part covers Phil Gramm and his legislation. The second part explains the financial Armageddon resulting from that legislation. Deregulation created a system of incentives that channeled the greed of an industry that has yet to have a crisis of conscience.

Economic ideology often looks fine in print, but the theory based policies of the last two decades have shown disastrous results. Phil Gramm and his group of deregulators removed rules put in place after the Great Depression to prevent abuse of the financial system. See story. After a few short years the lack of oversight has turned the orderly capital markets into the Wild West.

Part of what's really happening is the United States is nationalizing all major systemic threats to the fiat money system. A system that cracked with deregulation as the catalyst. Policy designed to limit Big Government had the opposite effect. Ironic isn't it? Some believe the US can no longer be competitive in a free market. Therefore nationalized U.S. companies will be better able to compete with China and foreign capital which operates highly subsidized industries.

When the government deregulates key industries it's a grave mistake and even more costly than keeping them regulated. They did it with the airlines, they did it with energy trading, and they did it with Wall Street finance. How many bankruptcies is that? The cost of those mistakes is passed on to you and me, the taxpayers and the shareholders. The Elite actually laugh about this fact.

The following excerpts are from two of the best articles written all year on this subject. They are submitted here, quoted in part, for reference and comparative analysis:

Story One: Deregulation Legislation

The New York Times
By and
November 16, 2008

Background on Phil Gramm

On Capitol Hill, Mr. Gramm became the most effective proponent of deregulation in a generation, by dint of his expertise (a Ph.D in economics), free-market ideology, perch on the Senate banking committee and force of personality (a writer in Texas once called him “a snapping turtle”). And in one remarkable stretch from 1999 to 2001, he pushed laws and promoted policies that he says unshackled businesses from needless restraints but his critics charge significantly contributed to the that has rattled the nation.

He pushed through a provision that ensured virtually no regulation of the complex financial instruments known as , including credit swaps, contracts that would encourage risky investment practices at Wall Street’s most venerable institutions and spread the risks, like a virus, around the world.

Many of his deregulation efforts were backed by the Clinton administration. Other members of Congress — who collectively received hundreds of millions of dollars in campaign contributions from financial industry donors over the last decade — also played roles.

In late 1999, Mr. Gramm played a central role in what would be the most significant financial services legislation since the Depression. The Gramm-Leach-Bliley Act, as the measure was called, removed barriers between commercial and investment banks that had been instituted to reduce the risk of economic catastrophes. Long sought by the industry, the law would let commercial banks, securities firms and insurers become financial supermarkets offering an array of services.

The measure, which Mr. Gramm helped write and move through the Senate, also split up oversight of conglomerates among government agencies. The Securities and Exchange Commission, for example, would oversee the brokerage arm of a company. Bank regulators would supervise its banking operation. State insurance commissioners would examine the insurance business. But no single agency would have authority over the entire company.

Banking Corporatocracy

His economic views — and seat on the Senate banking committee — quickly won him support from the nation’s major financial institutions. From 1989 to 2002, federal records show, he was the top recipient of campaign contributions from commercial banks and in the top five for donations from Wall Street. He and his staff often appeared at industry-sponsored speaking events around the country.

He left Capitol Hill in 2002 joining UBS as a senior investment banker and head of the company’s lobbying operation.

Mr. Gramm, now 66, who declined to discuss his compensation at UBS, picked an opportune moment to move to Wall Street. Major financial institutions, including UBS, were growing, partly as a result of the Gramm-Leach-Bliley Act.

Increasingly, institutions were trading the derivatives instruments that Mr. Gramm had helped escape the scrutiny of regulators. UBS was collecting hundreds of millions of dollars from credit-default swaps. (Mr. Gramm said he was not involved in that activity at the bank.) In 2001, a year after passage of the commodities law, the derivatives market insured about $900 billion worth of credit; by last year, the number had swelled to $62 trillion.

Gramm's Wife and Swaps

Created to help companies and investors limit risk, swaps are contracts that typically work like a form of insurance. A bank concerned about rises in interest rates, for instance, can buy a derivatives instrument that would protect it from rate swings. , one type of derivative, could protect the holder of a mortgage security against a possible default.

Earlier laws had left the regulation issue sufficiently ambiguous, worrying Wall Street, the Clinton administration and lawmakers of both parties, who argued that too many restrictions would hurt financial activity and spur traders to take their business overseas. And while the — under the leadership of Mr. Gramm’s wife, Wendy — had approved rules in 1989 and 1993 exempting some swaps and derivatives from regulation, there was still concern that step was not enough.

They Knew the Risks

From 1999 to 2001, Congress first considered steps to curb predatory loans — those that typically had high fees, significant prepayment penalties and ballooning monthly payments and were often issued to low-income borrowers. Foreclosures on such loans were on the rise, setting off a wave of .

But Mr. Gramm did everything he could to block the measures. In 2000, he refused to have his banking committee consider the proposals, an intervention hailed by the National Association of Mortgage Brokers as a “huge, huge step for us.”

It was Mr. Gramm who most effectively took up the fight against more government intervention in the markets.

In the final days of the Clinton administration Mr. Gramm celebrated another triumph. Determined to close the door on any future regulation of the emerging market of derivatives and swaps, he helped pushed through legislation that accomplished that goal.

In December 2000, the Commodity Futures Modernization Act was passed as part of a larger bill by unanimous consent after Mr. Gramm dominated the Senate debate.

“This legislation is important to every American investor,” he said at the time. “It will keep our markets modern, efficient and innovative, and it guarantees that the United States will maintain its global dominance of financial markets.”

But many experts disagree, including some of Mr. Gramm’s former allies in Congress. They say the lack of oversight left the system vulnerable. Some critics worried that the lack of oversight would allow abuses that could threaten the economy.

Frank Partnoy, a law professor at the University of San Diego and an expert on derivatives, said, “No one, including regulators, could get an accurate picture of this market. The consequences of that is that it left us in the dark for the last eight years.” And, he added, “Bad things happen when it’s dark.”

UBS was among them. The bank has declared nearly $50 billion in credit losses and write-downs since the start of last year, prompting a bailout of up to $60 billion by the Swiss government.

“The virtually unregulated over-the-counter market in credit-default swaps has played a significant role in the credit crisis, including the now $167 billion taxpayer rescue of A.I.G.,” , the chairman of the S.E.C. and a former congressman, said Friday.

Gramm Hindsight Philosophy

“Phil Gramm was the great spokesman and leader of the view that market forces should drive the economy without regulation,” said James D. Cox, a corporate law scholar at . “The movement he helped to lead contributed mightily to our problems.”

But looser regulation played virtually no role, Gramm argued, saying that is simply an emerging myth.

“There is this idea afloat that if you had more regulation you would have fewer mistakes,” he said. “I don’t see any evidence in our history or anybody else’s to substantiate it.” He added, “The markets have worked better than you might have thought.”

“He is a true dyed-in-the-wool free-market guy. He is very much a purist, an idealist, as he has a set of principles and he has never abandoned them,” said , a Republican and former senator from Illinois. “This notion of blaming the economic collapse on Phil Gramm is absurd to me.”

But Michael D. Donovan, a former S.E.C. lawyer, faulted Mr. Gramm for his insistence on deregulating the derivatives market.

“He was the architect, advocate and the most knowledgeable person in Congress on these topics,” Mr. Donovan said. “To me, Phil Gramm is the single most important reason for the current financial crisis.”

Mr. Gramm, ever the economics professor, disputes his critics’ analysis of the causes of the upheaval. He asserts that swaps, by enabling companies to insure themselves against defaults, have diminished, not increased, the effects of the declining housing markets.

“This is part of this myth of deregulation,” he said in the interview. “By and large, credit-default swaps have distributed the risks. They didn’t create it. The only reason people have focused on them is that some politicians don’t know a credit-default swap from a turnip.”

“They are saying there was 15 years of massive deregulation and that’s what caused the problem,” Mr. Gramm said of his critics. “I just don’t see any evidence of it.”

Well Senator, here comes your evidence. Michael Lewis's work deserves a Pulitzer Prize and should be read in full from the original source. It's a little vulgar, but that's what makes it real. That's what brings you into Wall Street.

Story Two: How Armageddon Works

Condé Nast


December 2008

What Lewis Thinks

I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.

The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

What Eisman Thinks

There’s a long list of people who now say they saw it coming all along but a far shorter one of people who actually did. Of those, even fewer had the nerve to bet on their vision. It’s not easy to stand apart from mass hysteria—to believe that most of what’s in the financial news is wrong or distorted, to believe that most important financial people are either lying or deluded—without actually being insane. A handful of people had been inside the black box, understood how it worked, and bet on it blowing up. Whitney rattled off a list with a half-dozen names on it. At the top was Steve Eisman.

Eisman entered finance about the time I exited it. He’d grown up in New York City and gone to a Jewish day school, the University of Pennsylvania, and Harvard Law School. In 1991, he was a 30-year-old corporate lawyer. “I hated it,” he says. “I hated being a lawyer. My parents worked as brokers at Oppenheimer. They managed to finagle me a job. It’s not pretty, but that’s what happened.”

He was hired as a junior equity analyst, a helpmate who didn’t actually offer his opinions. That changed in December 1991, less than a year into his new job, when a subprime mortgage lender called Ames Financial went public and no one at Oppenheimer particularly cared to express an opinion about it. One of Oppenheimer’s investment bankers stomped around the research department looking for anyone who knew anything about the mortgage business. Recalls Eisman: “I’m a junior analyst and just trying to figure out which end is up, but I told him that as a lawyer I’d worked on a deal for the Money Store.” He was promptly appointed the lead analyst for Ames Financial. “What I didn’t tell him was that my job had been to proofread the ­documents and that I hadn’t understood a word of the fucking things.”

The second company for which Eisman was given sole responsibility was Lomas Financial, which had just emerged from bankruptcy. “I put a sell rating on the thing because it was a piece of shit,” Eisman says. “I didn’t know that you weren’t supposed to put a sell rating on companies. I thought there were three boxes—buy, hold, sell—and you could pick the one you thought you should.” He was pressured generally to be a bit more upbeat, but upbeat wasn’t Steve Eisman’s style.

Eisman stuck to his sell rating on Lomas Financial, even after the company announced that investors needn’t worry about its financial condition, as it had hedged its market risk. “The single greatest line I ever wrote as an analyst,” says Eisman, “was after Lomas said they were hedged.” He recited the line from memory: “ ‘The Lomas Financial Corp. is a perfectly hedged financial institution: It loses money in every conceivable interest-rate environment.’ I enjoyed writing that sentence more than any sentence I ever wrote.” A few months after he’d delivered that line in his report, Lomas Financial returned to bankruptcy.

Eisman wasn’t, in short, an analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. “You have to understand,” Eisman says in his defense, “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit what it sold.”

FrontPoint Partners

Eisman quit Oppenheimer in 2001 to work as an analyst at a hedge fund, but what he really wanted to do was run money. FrontPoint Partners, another hedge fund, hired him in 2004 to invest in financial stocks.

He attracted people whose worldviews were as shaded as his own—Vincent Daniel, for instance, who became a partner and an analyst in charge of the mortgage sector. Danny Moses, who became Eisman’s head trader, was another who shared his perspective.

Both Daniel and Moses enjoyed, immensely, working with Steve Eisman. He put a fine point on the absurdity they saw everywhere around them. “Steve’s fun to take to any Wall Street meeting,” Daniel says. “Because he’ll say ‘Explain that to me’ 30 different times. Or ‘Could you explain that more, in English?’ Because once you do that, there’s a few things you learn. For a start, you figure out if they even know what they’re talking about. And a lot of times, they don’t!”

What Makes a Bad Bond

By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market. In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Eisman couldn’t understand who was making all these loans or why.

The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.

The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short. “What Lippman did, to his credit, was he came around several times to me and said, ‘Short this market,’ ” Eisman says. “In my entire life, I never saw a sell-side guy come in and say, ‘Short my market.’”

The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking home­owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done.

Eisman knew subprime lenders could be scumbags. What he 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.

Gaming the Rating Agencies

“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,” Eisman says.

As an investor, Eisman was allowed on the quarterly conference calls held by Moody’s but not allowed to ask questions. The people at Moody’s were polite about their brush-off, however. The C.E.O. even invited Eisman and his team to his office for a visit in June 2007. By then, Eisman was so certain that the world had been turned upside down that he just assumed this guy must know it too. “But we’re sitting there,” Daniel recalls, “and he says to us, like he actually means it, ‘I truly believe that our rating will prove accurate.’ And Steve shoots up in his chair and asks, ‘What did you just say?’ as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him.”

“With all due respect, sir,” Daniel told the C.E.O. deferentially as they left the meeting, “you’re delusional.”

This wasn’t Fitch or even S&P. This was Moody’s, the aristocrats of the rating business, 20 percent owned by Warren Buffett. And the company’s C.E.O. was being told he was either a fool or a crook by one Vincent Daniel, from Queens.

You have to understand this,” Eisman says. “This was the engine of doom.”

Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O.

The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.

Feeding the Machine

Eisman, Daniel, and Moses then flew out to Las Vegas for an even bigger subprime conference. By now, Eisman knew everything he needed to know about the quality of the loans being made. He still didn’t fully understand how the apparatus worked, but he knew that Wall Street had built a doomsday machine. He was at once opportunistic and outraged.

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds.”

After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You prick, you don’t give a fuck about the investors in this thing.”

“Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw.

There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them.

Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all.

“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 are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

Bankrupt Without a Conscience

“The investment-banking industry is fucked,” Eisman had told me a few weeks earlier. “These guys are only beginning to understand how fucked they are. It’s like being a Scholastic, prior to Newton. Newton comes along, and one morning you wake up: ‘Holy shit, I’m wrong!’ ” Now Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. The investment banks were not just fucked; they were extinct.

He had tried a thousand times in a thousand ways to explain how screwed up the business was, and no one wanted to hear it. “That Wall Street has gone down because of this is justice,” he says. “They fucked people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

A friend of mine created the first mortgage derivative in 1986, a year after we left the Salomon Brothers trading program. (“The problem isn’t the tools,” he likes to say. “It’s who is using the tools. Derivatives are like guns.”)

Salomon CEO Speaks

John Gutfreund [CEO of Salomon Brothers] had been forced to resign from Salomon Brothers and fallen on harder times. I heard later that a few years ago he’d sat on a panel about Wall Street at Columbia Business School. When his turn came to speak, he advised students to find something more meaningful to do with their lives. As he began to describe his career, he broke down and wept.

He thought the cause of the financial crisis was “simple. Greed on both sides—greed of investors and the greed of the bankers.” I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.

John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation.

He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

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. 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.

Gutfreund agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle.

[If you enjoyed this please read the entire articles at their original source. They have much more detail than the pieces cut out here.]

Tuesday, November 11, 2008

Three Great Banking Documentaries

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as self-evident.” -Arthur Schopenhauer

Many of us right now want to be "realistic" and believe the financial system will correct itself. The optimist in us, with a lifetime of programming, thinks things will get back to normal. The market will right itself over time, like it always has. The truth is our financial system has been so fundamentally damaged we will never return to what we once thought was normal. Watch the following three documentaries and you'll better understand why this is true.

Reliance on Foreign Capital
Before we get to the films I'd like to expand on a few ideas to ponder while you watch. One is reliance on foreign capital. During the election the issue of the United State's reliance on foreign oil was hammered over and over. None of us heard scripted speeches on the reliance of massive foreign capital. A reliance that drove Americans to fight England and its corrupt banking system in the . Guess what country is right now. So how did the US fall so far of the path of its national heritage?

Part of it is blind disregard to fundamental systemic threats. The threat of $150 oil has been well known for . Only once $150 oil became a reality was the threat real. Do we have to wait for a total collapse of the global financial system in order to deal with a $53 trillion U.S. national debt. Many people want to know, “How can this be happening to the richest country in the world?”

Here's one theory. In 1972, during his first year as director of the Council on Foreign Relations, wrote:

Nation state as a fundamental unit of man's organized life has ceased to be the principal creative force: International banks and multinational corporations are acting and planning in terms that are far in advance of the political concepts of the nation-state.

Just How Much Money Can They Print?

The documentaries do an amazing job of explaining how money creation works. Everyone knows the U.S. Treasury has been printing money 24/7 for years. What no one really knows is just how long they can add dollars to the system. What is the ceiling to debt creation? Fundamentally, there is a limit based on bank reserve requirements. Also, print too much and hyperinflation enters the system.

During one of the financial crisis grill sessions Congressman Ron Paul asked Chairman Bernake:

So my question boils down to this. How in the world can we expect to solve the problems of inflation, that is the increase in the supply of money, with more inflation?

Here is a possible answer. The U.S. Treasury with the backing of the Federal Reserve and World Bank are on the path to bailout the entire system. For the U.S. the plan is: Nationalize all debt that is a systemic threat or go bankrupt. The Fed is on the verge of eliminating minimum bank reserve rates. So basically taking them from 10% to 0%. We touched on this issue in a prior story.

Theoretically when 10% of a bank's credit is held in reserve there is a limit to how much they can loan. When this rate goes to zero there is no limit. The final stop is thus bankruptcy. So this means an all or nothing push to preserve the fiat money system backing the dollar. It's rally or fail time.

Films and Quotes
The following three videos do a masterful job at explaining the banking system. They explain how fiat currency works, how a reserve banking system functions, and the problems with these systems. Included are some amazing quotes from each film. Look for future articles here at GTM about the and some more solid numbers addressing the theory of "Rally or Fail." This concept will be expanded upon for sure!

Video Number One:
Made by / Jan. 2008

“Many are starting to ask: Where would the U.S. Government turn if it needed a bailout?”

“The only issue that is more severe than this would be the idea that an Islamic fundamentalist would get his or her hands on a nuclear weapon and use it against us. Beyond that there is nothing that is more severe than this. This issues represents the potential fiscal meltdown of this Nation. And it absolutely guarantees, if it’s not addressed, that our children will have less of a quality of life than we had. That they will have a government that they can’t afford.” - (Senate Budget Committee)

“We are trying to consume more than we produce. We can do that in the short run, but over the long run it is of course impossible. Without savings there is no future.” - (Fed Chairman 1987-2006)

“The Vice President basically told me, ‘We don’t have to worry about deficits.’ Which I got to tell you was really a shock to me... I think we only need to look at the fate of other countries that lived beyond their means for a long time. You inevitably get into trouble. When you get extended to the point that you can’t service your debt you’re finished.” - (Sec. of the Treasury 2001-2002) [mentioned in a prior story]

“The first Baby Boomer will reach 62 and be eligible for early retirement social security Jan. 1, 2008. They’ll be eligible for Medicare just three years later. And when those Boomers start retiring in mass, then that will be a tsunami of spending that could swamp our ship of state, if we don’t get serious.” - (U.S. Comptroller General 1998-2008)

Video Number Two:
Made by and Pat Carmack / 1996

Part 1

Part 2

“We are on the verge of a global transformation. All we need is the right major crisis and the nation will accept the New World Order.” -

Prior to his death published in the NY Times:
“These International bankers and Rockefeller-Standard Oil interests control the majority of newspapers and the columns of these papers to club into submission or drive out of public office officials who refuse to do the bidding of the powerful corrupt cliques which compose the invisible government.” –

On the day the Federal Reserve Bill passed:
“This act establishes the most gigantic trust on earth. When the President signs this bill, the invisible government by the Monetary Power will be legalized. The people may not know it immediately, but the day of reckoning is only a few years removed… The worst legislative crime of the age is perpetrated by this banking bill.” -

One year after the passage of the Federal Reserve Bill:
“They know in advance when to create panics to their advantage. They also known when to stop panic. Inflation and deflation work equally well for them when they control finance.” -Rep. Charles August Lindbergh

“Increased capital requirements put an upper limit to fractional reserve lending.” -Bill Still

“Our banks cannot loan more and more money to buy more and more time before the next depression, as a maximum loan ratio is now set. It means those nations with the lowest bank reserves in their systems have already felt the terrible effects of this credit contraction as their banks scramble to raise money to increase their reserves to 8%. To raise the money they had to sell stocks, which depressed their stock markets, and began the depression first in their countries.” -Bill Still [refering to Japan which we'll cover in the next article]

Video Number Three:
Made by Peter Joseph / Oct. 2008

“We were seeing how very important it is to bring about, in the human mind, the radical revolution. The crisis is a crisis in consciousness. A crisis that can not anymore accept the old norms, the old patterns, the ancient traditions.” –“Society today is composed of a series of institutions… Yet, of all the social institutions we are born into, directed by, and conditioned upon there seems to be no system as taken for granted and misunderstood as the monetary system.” –Peter Joseph

“The real deception is when we distort the value of money. When we create money out of thin air. We have no savings, yet there is so called 'capital'.” –
“New money is always needed to help cover the perpetual deficit built into the system, caused by the need to pay the interest. What this also means, is that mathematically defaults and bankruptcy are literally built into the system.” –Peter Joseph

"There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.” – (President of the United States)

"The majority of the people in the United States have no idea that we are living off the benefits of a clandestine empire. That today there`s more slavery in the world than ever before. And then you have to ask yourself, 'Well if it's an empire, then who's the emperor?'... We do have what I consider to be the equivalent of the emperor, and it`s what I call the Corporatocracy... At the very top of the corporatocracy you really can`t tell where the person`s working, for a private corporation or the government, because they're always moving back and forth. So, you know, you've got a guy who one moment is the president of a big construction company, like Haliburton, and the next moment he's Vice President of the United States." -
"We can either have Democracy in this country or we can have great wealth concentrated in the hands of a few, but we can't have both. " - (Supreme Court Justice)

"It's not politicians that can solve problems. They have no technical capabilities. They don't know how to solve problems. Even if they were sincere, they don't know how to solve problems. It's the technicians that produce the desalinization plants. It's the technicians that give you electricity, that give you motor vehicles, that heat your house and cool it in the summertime. It's technology that solves problems, not politics. Politics cannot solve problems, because they are not trained to do so." -
"This tendency to blindly hold on to a belief system, sheltering it from new, possibly transforming information, is nothing less than a form of 'intellectual materialism.' The monetary system perpetuates this materialism not only by its self preserving structures, but also through the countless number of people who have been conditioned into blindly, and thoughtlessly upholding these structures, therefore becoming 'self-appointed guardians of the status quo.' Sheep, which no longer need a sheep dog to control them, for they control each other by ostracizing those who step out of the norm." -Peter Joseph

What we are trying, in all these discussions and talks here, is to see if we cannot radically bring about a transformation of the mind. Not accepting things as they are! But the understanding, to go into it, to examine it, to give your heart and your mind with everything you have. To find out a way of living differently. But that depends on you and not somebody else. Because in this there is no teacher--no pupil. There is no leader. There is no guru. There is no master--no savior. You yourself are the teacher and the pupil. You are the master. You are the guru. You are the leader. You are everything! And to understand is to transform what is. -Jiddu Krishnamurti


Sunday, November 9, 2008

Front Running A Systemic Market Crash: PPT Style

Ever notice how official speeches to prop up the US capital markets are timed right before a massive sell off? How about those last hour rallies when the market looks really bad? Let’s explore just what the Plunge Protection Team can do. For starters, the White House came out with the trumpets to kick off the open of 2008. The Dow then peeled off 600 points making it the worst January open the stock market has ever seen--ever. Not bad for a “strong and solid” market! On Jan. 4th President Bush said the following:

President Meets with Working Group on Financial Markets

“I had quite a fascinating and productive meeting with the President's Working Group on Financial Markets, chaired by Secretary Paulson. I want to thank the members for working diligently to monitor our capital market system, our financial system. And while there is some uncertainty, the report is, is that the financial markets are strong and solid. And I want to thank you for being diligent. This economy of ours is on a solid foundation…”

What is the Working Group on Financial Markets?

Executive Order 12631 -- Working Group on Financial Markets

By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:

(1) the Secretary of the Treasury, or his designee;

(2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee;

(3) the Chairman of the Securities and Exchange Commission, or his designee; and

(4) the Chairman of the Commodity Futures Trading Commission, or her designee.

(b) The Secretary of the Treasury, or his designee, shall be the Chairman of the Working Group.

Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:

(1) the major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987, and any of those recommendations that have the potential to achieve the goals noted above; and

(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.

(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.

(c) The Working Group shall report to the President initially within 60 days (and periodically thereafter) on its progress and, if appropriate, its views on any recommended legislative changes.

Sec. 3. Administration. (a) The heads of Executive departments, agencies, and independent instrumentalities shall, to the extent permitted by law, provide the Working Group such information as it may require for the purpose of carrying out this Order.

(b) Members of the Working Group shall serve without additional compensation for their work on the Working Group.

(c) To the extent permitted by law and subject to the availability of funds therefor, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions.

Ronald Reagan

The White House,

March 18, 1988.

[Filed with the Office of the Federal Register, 11:23 a.m., March 21, 1988]

Treasury's War Room

These quiet meetings of the Working Group are the financial world's equivalent of the war room. The officials gather regularly to discuss options and review crisis scenarios because they know that the government's reaction to a crumbling stock market would have a critical impact on investor confidence around the world. (Fromsom)

In fact, as Ambrose Evans-Pritchard of the U.K. Telegraph notes, Secretary of the Treasury, Hank Paulson has called for the PPT to meet with greater frequency and set up “a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis. The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges.”

"The government has a real role to play to make a 1987-style sudden market break less likely. That is an issue we all spent a lot of time thinking about and planning for," said a former government official who attended Working Group meetings. "You go through lots of fire drills and scenarios. You make sure you have thought ahead of time of what kind of information you will need and what you have the legal authority to do."

In the event of a financial crisis, each federal agency with a seat at the table of the Working Group has a confidential plan. At the SEC, for example, the plan is called the "red book" because of the color of its cover. It is officially known as the Executive Directory for Market Contingencies. The major U.S. stock markets have copies of the commission's plan as well as the CFTC's.

"We all have everybody's home and weekend numbers," said a former Working Group staff member.

The Working Group's main goal, officials say, would be to keep the markets operating in the event of a sudden, stomach-churning plunge in stock prices -- and to prevent a panicky run on banks, brokerage firms and mutual funds. Officials worry that if investors all tried to head for the exit at the same time, there wouldn't be enough room -- or in financial terms, liquidity -- for them all to get through. In that event, the smoothly running global financial machine would begin to lock up.

This sort of liquidity crisis could imperil even healthy financial institutions that are temporarily short of cash or tradable assets such as U.S. Treasury securities. (Fromsom)

[This might explain the often seen cash infusion, or massive buying of index futures, after 2:30pm.]

According to John Crudele of the New York Post, the Plunge Protection Team's (PPT) modus operandi was revealed by a former member of the Federal Reserve Board, Robert Heller. Heller said that disasters could be mitigated by “buying market averages in the futures market, thus stabilizing the market as a whole.”

Some Say the PPT Doesn’t Exist (from John Mauldin)

Every time the market drops and then "mysteriously" rallies, knowing individuals look at each other and nod, seeing the handiwork of the PPT.

Let's say it straight out. The plunge protection team does not exist. It is an urban myth. Let me step by step prove it does not exist, and see if we can learn something in the process.

Art Cashin, of CNBC fame, and one of the real veterans of the markets, who has seen it all, wrote me the following very clear thoughts:

Trading desks do arbitrage program trading for a fraction of a percent on a trade. Any attempt by the Fed to manipulate the market would just make a lot of money for hedge funds and trading desks.

The amounts of money required to attempt such a manipulation would be huge. We are talking tens of billions of dollars if there was a true collapse going on. The collective size of the trading community in the world (hedge funds and "prop" desks - a prop desk is a proprietary desk for an investment bank or broker-dealer) is in the multiple hundreds of billions. It would require the willingness to lose billions of dollars every time you took the plunge, so to speak.

If the Fed or Treasury or some slush fund did buy stocks, it would inject liquidity or more total money into the financial system or money supply. Since the Fed openly manipulates the money supply every day in transactions that everyone can see, in order for the Fed to hide the activity of the PPT, they would have to take out liquidity by selling treasury notes. Otherwise, the numbers at the end of the day or week would not add up, and someone would notice. But if they were taking out liquidity and the money supply did not go down, then someone would know something was up. You can't hide these numbers, unless you can get a lot of clerks at the Fed and elsewhere to agree to lie.

[Maybe not a lie. As Spock once said, "An omission." They stopped publishing M3 in March 2006. This is three years after Mauldin called it a myth.]

How To Hide PPT Action (from Mike Whitney)

This may explain why the Federal Reserve mysteriously decided to stop publishing its M-3 report. Since the Fed is the “main resource” for buying averages in the futures market “the money is injected into markets via the New York Fed's Repo desk, which easily showed up in the M-3…. Without the useful resource of M-3”, Robert McHugh, Ph.D.says, “we need to find other tools to monitor when the PPT is likely to intervene, and kill shorts”.

What PPT Action Looks Like (from Minyanville)

Wall-Streeters and the media have called those who claim the government intervenes in the stock market ridiculous. They'd better. If it were ever found out that Washington does intervene in the market, all remaining confidence in the integrity of markets would be lost.

Tuesday morning in Europe when UBS () announced it would write down $19 billion and Deutsche Bank () made similar pronouncements, both stocks were down big and the market was indicated much lower. That was the same day Lehman Brothers () was supposed to sell $3 billion in preferred stock to raise much needed capital. Imagine Lehman trying to get that deal done in such a messy tape.

Then all of a sudden those stocks began to turn. Along with the market, they closed higher on the day. Futures steadily rose all morning and methodically ended at the highs of the day. U.S. stocks saw one of the biggest rallies of the year. LEH not only got its deal done, but the stock rose so much the firm decided to grant another $1 billion in stock to its most loyal and secret investors.

It's all highly convenient things turned out this way. The markets went from potential disaster based on fundamentals to a rip-roaring rally just when the government and banks needed it. It's also highly suspicious.

But the pundits don't do a very good job of debunking all the ancillary evidence of such intervention. Their main argument is that there's no way to hide stock market buying by the government. That argument is very flimsy; there are many ways to hide it.

How about all these “loans” the Federal Reserve is making to dealers. There could easily be an arrangement that looks like a simple loan but in fact indemnifies the dealer from losses on any assets purchased with the proceeds of the loan. Just look at the deal the Fed made with JPMorgan () in buying Bear Stearns ().

The Fed said it was taking control of $30 billion of a BSC portfolio, but not buying those assets, as currently the 1913 Federal Reserve act doesn't permit such an action. However, the Fed is the the residual claimant, so it's apparent it effectively has equity even if it won't admit it. Overall, the Fed appears to be using any legal or structural manifestations necessary to accomplish what it wants to do despite what the Federal Reserve Act actually permits it to do.

How To Stage A PPT Bull Run

The editors of the New York Times summarized the feelings of many market-watchers who were baffled by this odd recovery:

“The torrent of bad news on housing is only worsening, with a report yesterday that new home sales for January had their steepest slide in 13 years...Manufacturing has already slipped into a recession, with activity contracting in two of the last three months. How is it then that investors took Mr. Bernanke's words as a “buy” signal?”

Robert McHugh, Ph.D. has provided a description of how it works which seems consistent with the comments of Robert Heller. McHugh lays it out like this:

The PPT decides markets need intervention, a decline needs to be stopped, or the risks associated with political events that could be perceived by markets as highly negative and cause a decline; need to be prevented by a rally already in flight. To get that rally, the PPT's key component — the Fed — lends money to surrogates who will take that fresh electronically printed cash and buy markets through some large unknown buyer's account. That buying comes out of the blue at a time when short interest is high. The unexpected rally strikes blood, and fear overcomes those who were betting the market would drop. These shorts need to cover, need to buy the very stocks they had agreed to sell (without owning them) at today's prices in anticipation they could buy them in the future at much lower prices and pocket the difference. Seeing those stocks rally above their committed selling price, the shorts are forced to buy — and buy they do. Thus, those most pessimistic about the equity market end up buying equities like mad, fueling the rally that the PPT started. Bingo, a huge turnaround rally is well underway, and sidelines money from Hedge Funds, Mutual funds and individuals' rushes in to join in the buying madness for several days and weeks as the rally gathers a life of its own. (Robert McHugh, Ph.D., “The Plunge Protection Team Indicator”)

According to Michael Edward: (“The Secrets of the Plunge Protection Team”

“Since 911, there have been at least three major long-term stock market rallies. In all 3 instances, when the markets opened all the indexes began to quickly plunge. In each incidence, by early afternoon the markets were brought back from the brink of collapse to the surprise of everyone, including historical analysts….An event that should have sent markets spiraling downward was the Enron, et al, unprecedented corporate accounting scandals. Yet despite this, an unprecedented across-the-board markets rally began on July 24, 2002. Once again, the European Press called it a ‘PPT rally'".

The Danger of Free Market Intervention

Edward goes on to say that outside the US it's “no secret” that the market is being manipulated. He cites an article in the UK Guardian on 9-16-01 which states, "that a secretive committee... dubbed 'the plunge protection team'... is ready to coordinate intervention by the Federal Reserve on an unprecedented scale. The Fed, supported by the banks, will buy equities from mutual funds and other institutional sellers.”

Kenneth J. Gerbino put it like this in his recent article “The Big Sell Off” on

Latest figures from the Bank of International Settlements: $8.3 trillion of real money is controlling $313 trillion in derivatives. That's 38 to 1 leverage. These figures are just for the over - the - counter derivatives and do not include the global exchange traded derivatives in currencies, stocks and commodities which are another $75 trillion.”

“$8.3 trillion of real money is controlling $313 trillion in derivatives!”

This illustrates the sheer magnitude of the problem and the economy-busting potential of a miscalculation. That's why Warren Buffett calls derivatives “financial weapons of mass destruction.” If there's a fire-sale in hedge funds or derivatives, there's nothing the Plunge Protection Team or the Federal Reserve will be able to do to stop a meltdown. The market will crash leaving nothing behind.

Conclusion (from Bob Chapman)

Treasury securities are also used to fuel the Fed's repo pool which is used to power the PPT's market manipulations by making tens of billions of dollars available on a moment's notice. The Fed creates money out of nothing to buy treasuries from the primary dealers, who then use the sales proceeds to fund the operations of the President's Working Group on Financial Markets which assists the elitists in stealing from you on a 24/7 basis. The dealers offer to buy these securities back from the Fed within a month or less in what are called repurchase agreements. Thus, this "funny money" is shoveled back and forth from the Fed to the primary dealers and from the primary dealers back to the Fed as needed whenever the Illuminati deign that financial assistance for manipulation of markets is needed.

Treasuries are therefore the engine which drives this fraudulent scheme, a scheme that is completely illegal because the authority granted in Reagan's Executive Order creating the PPT is exceeded beyond all belief in what one day will be exposed as the greatest abuse of financial power by US government officials in the history of our country. Because of this blatant illegality, Buck-Busting Ben and Hanky Panky Paulson deny that the PPT does anything but meet occasionally to brainstorm pending issues.

See this here


March 18, 1988

by Mike Whitney

by Bob Chapman

July 5 2008


Apr 03, 2008

by Brett D. Fromson

The Washington Post

Sunday, February 23, 1997; Page H01

June 30, 2008

by John Mauldin

April 05, 2003


All trades, patterns, charts, systems, etc. discussed and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations.
All ideas and material presented are entirely those of the author and do not necessarily reflect those of the publisher.