I do not pretend to know what many ignorant men are sure of. -Clarence Darrow

This is the biggest block in our series on market manipulation.  We’re working toward an answer.  How do international banks manipulate the markets to service the U.S. war debt?  Make no mistake about the crash on Thursday.  That was no “fat finger” trader or an “M” accidentally being a “B” nonsense.  Unless you hear “international banks” and “leverage” and “unwind” in the same sentence, it’s not a valid explanation.  It takes hundreds of billions to make a wave in the equities market like that.  It was the fastest point drop in the history of the market.  Only something an international bank is capable of.  The rest of us are just trying not to drown in their wake.

How to Lose Money Betting the Market Will Crash on the Day it Crashes

If George Carlin could have designed an ETF it would be FAZ.  Maybe even with the same name.  It’s an ultra bear’s dream come true.  A way to profit as America circles the drain with financial Armageddon banker zombies roaming the streets while cities burn.  FAZ is a stock that can make +15% while the banks crash -5%.  You’d think it was the perfect stock to trade last Thursday.  It’s one of the fewer and fewer ways a retail trader can profit during a market crash.  There’s a catch.  The crash locked out anyone trying to exit with profit. By the end of the day, if you bought FAZ right before the crash, you actually had a loss.

How could this happen?  NASDAQ is the market maker for retail brokers in FAZ.  They control the bid/ask and retail orders go through them.  The problem is NASDAQ froze all exits on FAZ until the market closed.  They canceled trading in 256 names.  What is suspect is FAZ, and many other frozen stocks, are not on that list. The only way to exit FAZ was to sell in the after hours market on Thursday or wait for Friday’s open.  Essentially, Thursday’s crash created a no-bid market for FAZ and many other stocks.  How do you get zero bids on a stock that trades 165M shares in a day?

Max Keiser, the man who invented high frequency trading (HFT) source code, explains:

Remove all the buy orders that you control (since HFT traffic is 70% of the order flow, if you simply pull your HFT buy orders, you remove a huge chunk of the market – in a heartbeat – leaving a sudden price vacuum). If you wanted to scare congress to vote the way you wanted them to vote – a congress that is directly invested in stocks trading on the exchange and ETF’s tied to the prices on the exchange – just pull your buys. When they do what you want them to do–replace your buys. If you want to make the market go up–pull your sell orders. It works both ways. (It’s all detailed in my Virtual Specialist Technology patent–how to make markets in an ‘infinite inventory environment.’) (Huffington Post)

Keiser is describing a perpetual cash machine for market manipulators.  We’ll cover that later in this story.  Another method to lockout FAZ is this:

• A swap blows up
• The counterparty exposed to the swap blows up
• All swaps in that tranche are frozen
• The market crashes
• ETFs trading those swaps are locked out

The over-the-counter derivatives market could be a contributing reason why FAZ wouldn’t sell on Thursday.  Most ETFs are derivative products that mimic an index, which happen to trade on stock exchanges.  So you have an unregulated OTC instrument moonlighting on a regulated exchange.  If a swap blows up (as the Euro made a new low) it would logically effect ETFs.  Virtually none of the stock ETFs trade in equities.  They don’t own baskets of stocks.  They own baskets in swaps and futures contracts.

Fidelity has been marketing some 20 ETFs which their clients can trade for “free.”  How many of their clients got bent over a barrel this week?  The fine print is full of escape clauses.  These things aren’t insured and there’s no recourse if the exchange or the product fails.

Euro and Swaps

We’re facing a perfect storm loss/loss scenario from hedging activity.  It’s the same AIG shell game, just played on a different street corner that no one is watching.  It took people nearly a year to catchup and understand what subprime mortgage blow ups were doing.  Last week gave us a new bomb ripple in the subbasement of international banks.

Eurodollars are deposits denominated in U.S. dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the U.S., allowing for higher margins.

The Eurodollar futures contract refers to the financial futures contract based upon these deposits, traded at the Chicago Mercantile Exchange (CME) in Chicago. Eurodollar futures are a way for companies and banks to lock in an interest rate today, for money it intends to borrow or lend in the future.  Each CME Eurodollar futures contract has a notional or “face value” of $1,000,000, though the leverage used in futures allows one contract to be traded with a margin of about one thousand dollars. Trading in Eurodollar futures is extensive, and the market for them tends to be very liquid. The prices of Eurodollars are quite responsive to FED Policy, inflation, and economic indicators.

CME Eurodollar futures prices are determined by the market’s forecast of the 3-month USD LIBOR interest rate expected to prevail on the settlement date. The settlement price of a contract is defined to be 100.00 minus the official British Bankers Association fixing of 3-month LIBOR on the contract settlement date. For example, if 3-month LIBOR sets at 5.00% on the contract settlement date, the contract settles at a price of 95.00. (source)

On Thursday LIBOR hit  0.373% the highest since last August.  On Friday it hit 0.428% while the Euro crashed to a 14-month low against the dollar.  The gigantic interest rate swap market is based on LIBOR.  When the spread jumps 14% overnight someone is taking a massive hit. This concept is to today’s market what subprime was to the crash in 2008.  Let’s explore why derivatives are so important.

As the unregulated derivatives market grew the money that was in equities left for greener pastures.  Basically, the U.S. stock market is like the post-apocalyptic landscape in the movie Terminator.  It’s wounded, illiquid, and controlled by Skynet’s hunter-killer HFT drones who prowl for resistance money.  On Thursday the computers drove the market into a no-bid situation that blew out tons of retail money.  In the vacuum of the program trading nuclear blast Skynet computers, doing one million orders per second, jumped into the void making billions of dollars at our expense.

Swap Market Size

The European derivatives market is a complex mass that’s difficult to understand.  This is precisely why you never get an explanation about it from the media–until it’s too late.  Let’s go through some basics.  This is the largest cash market in the world.  It is growing exponentially as European governments fall. And it can take the U.S. equities market down with shock and awe.

NYSE Euronext European derivatives products ADV in April 2010  increased 51.5% compared to April 2009

NYSE Euronext U.S. cash products handled ADV in April 2010 decreased 26.6% compared to April 2009.  Year-to-date, U.S. cash products handled was down 34.3% from prior year levels.

NYSE Euronext U.S. matched exchange-traded products decreased 42.8% compared to April 2009.   Year-to-date, NYSE Euronext U.S. matched exchange-traded products was 45.9% below prior year levels. (source)

Money is flowing out of U.S. equities and ETFs and into European interest rate swaps.  It’s now the biggest game in town.  The following graph shows who the main players are in OTC derivatives, which are mainly interest rate, commodity, and currency swaps.

Large firms like Goldman Sachs are taking on more risk while smaller firms are cutting back.  Right now 41% of all swaps are backed by $USD.  This is a massive market that can react violently to ripples in interest rates.

The global equities markets are currently worth $45T.  Roughly half the value prior to the 2008 crash. That money did not come back. Compare that to amounts outstanding of OTC single-currency interest rate derivatives by currency (source):

Notional amounts outstanding
Euro $160,646B
US dollar $154,167B

Gross market values
Euro $6,255B
US dollar $6,473B

2009 Interest rate futures
N. America $600T
Europe $550T

The Number of Collateral Agreements in use in the OTC derivative market grew 14 percent over the past year. (source)

What are Swaps

Essentially, it’s the revamped bond market from the ’80s.  Instead of being long Euro bonds the banks turn them into insurance contracts at reduced cost and risk.  If you can borrow Euros cheaply and think the Euro is going up, and LIBOR will stay low, you sell that interest rate swap, or currency futures swap, or options swap, or you name it.  There’s dozens and dozens of ways to game the market with swaps.

In an interest rate swap, each counterparty  agrees to pay either a fixed or floating rate denominated in a particular currency to the other counterparty. The fixed or floating rate is multiplied by a notional principal amount (say, USD 1 million). This notional amount is generally not exchanged between counterparties, but is used only for calculating the size of cashflows to be exchanged.

The most common interest rate swap is one where one counterparty A pays a fixed rate (the swap rate) to counterparty B, while receiving a floating rate (usually pegged to a reference rate such as LIBOR).

At the point of initiation of the swap, the swap is priced so that it has a net present value of zero. If one party wants to pay 50 bps above the par swap rate, the other party has to pay approximately 50 bps over LIBOR to compensate for this.

The interest rate swap market is closely linked to the Eurodollar futures market which trades at the Chicago Mercantile Exchange.  (source)

How LIBOR is Created

Each cash desk in a contributor bank has a Thomson Reuters application installed. Each morning between 11.00 and 11.20 [London time] an individual at each bank, typically the currency dealer, takes their own rates for the day and inputs them into this, which links directly to the fixings team at Thomson Reuters.  Banks cannot see each others’ rates as they submit, only after final publication.

This was first developed in the 1980s as demand grew for an accurate measure of the real rate at which banks would lend money to each other. This became increasingly important as London’s status grew as an international financial centre. More than 20 per cent of all international bank lending and more than 30 per cent of all foreign exchange transactions now take place in London. (source)

Greek Netting

There’s tons of white papers presented to the Fed’s board of directors (prior to 2008) that say risk in swaps is low because it’s a new market and nothing has blown up yet.  This was an interesting statement:

The interest swap market has been increasingly taking on a benchmark role in the broader fixed income market that had previously virtually been the exclusive domain of U.S. Treasury debt securities. Given its greater prominence for the financial markets as a whole, the question of assessing the ability of the swaps market to continue to function without major impediments–such as heightened concerns about counterparty credit risk–when other (less liquid) markets are disrupted gains special significance. (source)

Here’s where Greece comes in.  It’s been on the verge of bankruptcy for two years, but was able to maintain a reasonable credit rating until last week.  Much of the swap market is built on the assumption of equal liquidity.  A practice called “netting” is used to mitigate risk.

Netting: Rather than exchanging fixed and floating payments on the dates specied in the swap contract, the values of the two payments are netted, and only the party with a net amount due transfers funds to its counterparty. (source)

This is good in theory, but the reality is most firms rehypothecate.  Basically they take all the money that netting is supposed to protect and often bet it against that same contract as a hedge. Division A does one thing and Division B bets against it, and neither knows.  Such was the case with AIG blowing up.  In the case of Goldman Sachs, they know and decide to commit fraud anyway.

Rehypothecate:  Involves the re-use of securities delivered. A dealer receiving securities as collateral may re-use the same security, to collateralize its own exposure with its counterparties for example. In the case of cash collateral, rehypothecation involves either using the cash received as collateral to buy investment securities, or to lend on to others, or to collateralize other derivatives exposures.

Forty-four percent of all respondents and 93 percent of large dealers report rehypothecating collateral.  Over 80 percent of collateral is in the form of cash deposits. (source)

Counterparties depend on the solvency of each other.  That solvency is put into question when the cash deposits are used to place more bets.  Risk is layered on more risk.  Then when a credit rating is dropped it triggers termination clauses.  This creates a run on the banks.  This happened in the mortgage backed securities market a couple years ago.  It’s a perfect example.

What Blow Ups Sound Like

One of the best authors on bond market blow ups is Michael Lewis.  He just wrote a great article in Vanity Fair about Michael Burry, the first man to short subprime.   Here’s an excerpt.

On June 14, 2007  the pair of subprime-mortgage-bond hedge funds effectively owned by Bear Stearns were in freefall. In the ensuing two weeks, the publicly traded index of triple-B-rated subprime-mortgage bonds fell by nearly 20 percent.

Just then Goldman Sachs appeared to Burry to be experiencing a nervous breakdown. His biggest positions were with Goldman, and Goldman was newly unable, or unwilling, to determine the value of those positions, and so could not say how much collateral should be shifted back and forth. On Friday, June 15, Burry’s Goldman Sachs saleswoman, Veronica Grinstein, vanished. He called and e-mailed her, but she didn’t respond until late the following Monday—to tell him that she was “out for the day.”

“This is a recurrent theme whenever the market moves our way,” wrote Burry. “People get sick, people are off for unspecified reasons.”

On June 20, Grinstein finally returned to tell him that Goldman Sachs had experienced “systems failure.”

That was funny, Burry replied, because Morgan Stanley had said more or less the same thing. And his salesman at Bank of America claimed they’d had a “power outage.”

“I viewed these ‘systems problems’ as excuses for buying time to sort out a mess behind the scenes,” he said. The Goldman saleswoman made a weak effort to claim that, even as the index of subprime-mortgage bonds collapsed, the market for insuring them hadn’t budged.

What this Means

See the parallels here?  Subprime bonds fell 20% creating a squeeze on credit.  We have LIBOR rising which is putting a squeeze on–basically everything. Instead of power outages we have lockouts and canceled orders.  The same ridiculous excuses are given to obscure reality.  Fat fingers with Bs and Ms?  Thursday’s crash is wake up call for complacency.  However, it’s being sold as an opportunity for dip buying.

The stock market is a perpetual cash machine for international banks (IBs).  It’s a game invented in the 1700s by London stock manipulators (see story).   Make the market go parabolic, then crash it to pay off war debt and protect Treasuries.  Dr. Ellen Brown has one of the best explanations for what’s going on:

The Wall Street Ponzi Scheme

The Ponzi scheme that has gone bad is not just another misguided investment strategy. It is at the very heart of the banking business, the thing that has propped it up over the course of three centuries. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top.

The Wall Street Ponzi scheme is built on “fractional reserve” lending, which allows banks to create “credit” (or “debt”) with accounting entries. Banks are now allowed to lend from 10 to 30 times their “reserves,” essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.

The problem is that banks create only the principal and not the interest necessary to pay back their loans, so new borrowers must continually be found to take out new loans just to create enough “money” (or “credit”) to service the old loans composing the money supply. The scramble to find new debtors has now gone on for over 300 years – ever since the founding of the Bank of England in 1694 – until the whole world has become mired in debt to the bankers’ private money monopoly. The Ponzi scheme has finally reached its mathematical limits: we are “all borrowed up.” (source)

First time home buyer credits are now expired.  The Fed can’t lend money for free indefinitely.  Soon the U.S. will be forced to raise cash.  The Fed will have to raise the prime rate and it will stress the system.  Unless prime dealers (IBs) unload their leverage without tanking the market.  This is the cornerstone.  Banks are levered up on low interest rates. Those swap positions have to unwind without creating cascading sell-offs.
Much of the recent rally was short covering.  New highs on very low volume.  That’s not new money buying up the market.  We know European derivatives volume is up 50% and U.S. stocks and ETFs are down 50%.  The 2010 rally was a short squeeze used to cover real distribution by large banks.  They have to unwind before interest rates are raised.

Think GLD is Safe?

There’s one last concept that is important in this pyramid.  People invested in GLD/SLV in lieu of owning the real metal are directly exposed to blow ups in the OTC derivatives market.  Another no-bid scenario like Thursday could wreak havoc in commodity ETFs.  This is a partial list of the major ETFs that were locked out:

Earlier Sunday, Nasdaq OMX announced it has canceled trades made Thursday in 12 additional stocks in which prices were at least 60% above the prior number, or at least 60% less than the earlier price. The additional names mostly included exchange-traded funds and notes, following estimates of 4,000 canceled trades across nearly 300 symbols previously announced. (MarketWatch)

The largest gold ETF is GLD with their vaults sitting in London.  It’s run by a mining consortium, backed by HSBC London, and Bank of NY Mellon as trustee.  Between 1999 and 2002 Gordon Brown sold 60% of the UK’s gold reserves at $275 an ounce.  The year he sold that final ounce the World Gold Council formed. It’s difficult to find out exactly who they are.  It reads like the early history of the Council on Foreign Relations.

So GLD is sponsored by World Gold Trust Services, LLC, or WGTS, which is wholly-owned by the World Gold Council, or WGC, a not-for-profit association registered under Swiss law. The Sponsor is a Delaware limited liability company and was formed on July 17, 2002.  Two years later they create GLD investment trust, formed on November 12, 2004.  The closing price on GLD that year was $44/shr.

The Trust Indenture was amended on November 26, 2007 to reflect the transfer of the listing of the Shares to NYSE Arca.  The close that year was $83.  Today it’s at $118 with a gain of 275% in six years.  In the same period, since Gordon Brown sold his last ounce, gold has gained 440%.

Holdings of the world’s largest gold exchange-traded fund, the SPDR Gold Trust (NYSE:GLD), jumped nearly 20 tons to a record 1,185.787 tons on Thursday. Year to date, however, (GLD) holdings has gained just 50 tons. (Reuters)

They sucker retail investors by marketing GLD as the paper equivalent of owning real gold.  This is a misconception held by gold/silver ETF owners. In GLD you need to own $11.8M in shares to convert the certificates into deliverable gold.  With SLV the number is $850k. The primary banks holding GLD/SLV use it for collateral to short COMEX futures. How many GLD owners know their position is bet against them in a leveraged market? Their $1 in GLD can turn into $15 COMEX shorts suppressing the price of gold.

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…

When the derivative positions of the banks are examined it becomes clear that JPMorgan Chase and HSBC together dominate the market. In 2008 they held close to 100% of the entire bank derivatives market in gold and precious metals.  -Adrian Douglas

How JPM Crashed Silver

The manipulation of SLV is more egregious, due to a smaller market, and primarily done by JP Morgan.  The DoJ is in active anti-trust investigation of JPM right now, which they named publicly (source).  JPM has a reported $70T in silver derivatives shorting their own product (SLV) which has a value of $5.2B. During the Bear Sterns take down JP Morgan bought control of Bear’s silver positions. Silver was nearing $21/oz. and about to bankrupt Bear with their short position.

Andrew McGuire, an independent London silver trader, became a whistleblower on silver manipulation.  In March, just prior to a CFTC hearing on gold/silver position limits, he and his wife were victims to a hit and run driver in a London shopping district.  They survived and the perp was caught after a high speed chase.  Testimony was given of this being an assassination attempt. Few details have been published.

McGuire wrote numerous emails to the CFTC warning and explaining how gold/silver manipulation worked during the February low.  He had evidence that JPM and HSBC were driving out long call option holders (source).  The above chart shows a 20% drop in SLV in the two weeks during McGuire’s warnings.  Here is an excerpt:

Thought it may be helpful to your investigation if I gave you the heads up for a manipulative event signaled for Friday, 5th Feb. The non-farm payrolls number will be announced at 8.30 ET. There will be one of two scenarios occurring, and both will result in silver (and gold) being taken down with a wave of short selling designed to take out obvious support levels and trip stops below. While I will no doubt be able to profit from this upcoming trade, it is an example of just how easy it is to manipulate a market if a concentrated position is allowed by a very small group of traders.

Scenario 1. The news is bad (employment is worse). This will have a bullish effect on gold and silver as the U.S. dollar weakens and the precious metals draw bids, spiking them higher. This will be sold into within a very short time (1-5 mins) with thousands of new short contracts being added, overcoming any new bids and spiking the precious metals down hard, targeting key technical support levels.

Scenario 2. The news is good (employment is better than expected). This will result in a massive short position being instigated almost immediately with no move up. This will not initially be liquidation of long positions but will result in stops being triggered, again targeting key support levels.

Both scenarios will spell an attempt by the two main short holders to illegally drive the market down and reap very large profits. Locals such as myself will be “invited” on board, which will further add downward pressure.

The question I would expect you might ask is: Who is behind the sudden selling and is it the entity/entities holding a concentrated position? How is it possible for me to know what will occur days before it will happen?

Only if a market is manipulated could this possibly occur.

I would ask you watch the “market depth” live as this event occurs and tag who instigates the move. This would surly help you to pose questions to the parties involved.

This kind of “not-for-profit selling” will end badly and risks the integrity of the COMEX and OTC markets.

I am aware that physical buyers in large size are awaiting this event to scoop up as much “discounted” gold and silver as possible. These are sophisticated entities, mainly foreign, who know how to play the short sellers and turn this paper gold into real delivered physical.

Given that the OTC market (where a lot of the selling occurs) runs on a fractional reserve basis and is not backed up by 1-1 physical gold, this leveraged short selling, where ownership of each ounce of gold has multi claims, poses a very large risk. (source)

JP Morgan controls 80% of the world’s gold and precious metals derivatives.  Through monopoly control of the market they took silver under $15/oz.  JPM is the custodian for SLV, the silver exchange-traded fund.  People who own shares in SLV think they own certificates representing silver for delivery.  This has been proven to be a fraud.  JPM does not have the actual silver deposits for delivery.  What they have is $70T in silver derivatives.  Nothing real is exchanged.  At one point, COMEX silver short contracts totaled twenty times the value of the world’s entire silver supply. (source)

Conclusion

Hopefully this lengthy article placed some bricks in alignment.  Bricks that form the foundation of the ongoing Wall Street pyramid scheme.  We learned that the U.S. stock market is illiquid and run by computers that can crash it faster and farther than ever.  We learned that ETFs designed to profit from those crashes don’t work.  They don’t work because they’re based on interest rates products so massive the slightest spike causes market instability.  We also learned that gold and silver products, used for such protection, are manipulated by the very same banks selling them.

There are two main power structures in the U.S.  The formal power resting in D.C. and the real power resting in NYC.  Most people are unaware of how the real power structure works.  We’re talking about shadow banking, the Council on Foreign Relations, old money families, corporations profiting off terrorism, secret global meetings, etc.  Policies and programs designed to squeeze credit and game the system in every way imaginable.

It is a mistake to look to the formal power structure for solutions.  Fundamental problems can never be resolved in that system.  It’s a total illusion to depend on a corrupt political system to solve problems it is complicit in creating. The solution is to attack the real power structure.  Their power can be marginalized.  The more people educate themselves and their friends the less that power is held over us.

Illegal manipulation of capital markets is done in concert with central banks to suppress precious metals, which supports a “strong” dollar.  It’s part of the larger matrix of control in Western finance.  A staggering amount of arbitrage, naked shorts, and other cross trades are designed to support the velocity of credit.  When that velocity nearly stopped in 2008, and credit dealers issued margin calls, it brought the financial system to the edge.

We are living with the same power structure America fought for independence against.  Sam Adams, John Hancock, and much of the Continental Congress were at times violently opposed to New York stock jobbers, the Crown’s money influence, and international bankers.  They did everything they could to insure fellow citizens would not be owned by international banks.  How would they respond to, “We’re all borrowed up.”

We have two big auction days for Treasuries coming up. The 10 year note on Wednesday and the 30 year bond on Thursday. The thirty year is the big one that makes everyone nervous. It’s a barometer for the willingness of other countries to service U.S. debt. There is intense pressure on this and the question is, “Will China continue to float the U.S.?” (see prior story)

There is a way to play the ETFs for a quick profit. Here’s how to place resting bids on Treasury auction days (calendar).

The various Treasury auctions happen once a month at 1:00 p.m. ET. The notes range from 4 weeks to 30 years and their auctions are spread throughout the month.

Let’s use last week’s auction as an example for setups. Sometimes clear levels of resistance are made before the auctions. One can then place a low risk buy-stop-market order above the day’s range, right before the auction happens.

So we don’t know which will pop TBT or TLT. These ETFs track the 20 year Treasury bond. They are the most liquid and popular way to play Treasuries. TLT is long the bond and TBT is short.

Place a resting buy-stop-market order on both names. The name that pops will trigger the order. This won’t catch the entire move, but it’s a low stress partly automated way to make money. It also saves focus to manage the exit. Exits need to be on the same time frame as the entries. The risk of holding these trades past 30 minutes is large. The idea is to catch the first big impulse move and get out.

These are 3min charts on TBT and TLT for the same two day period last week. You can see that TBT would fill for a quick profit and TLT would never fill. So you only have to manage the winner.

TBT

The green arrow indicates the resting bid. Brokers call them different things. Some are called buy-stop-market orders. When the price is touched a market order is executed to buy. This assures an immediate fill. We want to catch the impulse move.

Say an order for 500 shares of TBT was placed at 52.75. This is $0.05 above the day’s high. We want a little wiggle room to lower the risk of being faked out. Price must get an impulse move to execute the order. It fills 52.80 at the market. The move stalls 10 minutes later. A sell at the market around 53.55 is $375 profit.

TLT

These resting bids are placed at the same time on TBT and TLT. We’re looking for a new high to enter the trade. TLT didn’t work that week. No big deal. The order never fills and focus is shifted to the one that did.

Background Manipulation

Here is more of the bigger story underlying these trades. GTM wrote about this last March (see story). This is old news, but nothing has fundamentally changed. Here is a snippet:

President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures. We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried. -Wen Jiabao 03/13/09

On Sunday Bernanke does the first national interview a Federal Reserve chairman has ever done in 96 years. He says everything is fine and we’ll be back to business as usual by the end of the year. Then on Wednesday the Fed announces they will buy Treasuries until the end of days. So…

1. China warns about the financial stability of the U.S.
2. Bernanke goes on national television
3. Says he’s from Main Street, just like you and me
4. Then boldly lies about the economy

Three days later…

• FOMC announces a final push of a desperate crisis management plan
• U.S. dollar sees its 3rd biggest one-day decline ever
• Fed is now matching all of China’s $1 trillion in Treasuries

The Fed Buys Last Week’s Treasury Notes

Chris Martenson just exposed the way the Fed buys Treasuries under the table (see story). Here is a snippet:

Good grief! Just last week, when the auction results were announced it was trumpeted to great fanfare that there was “more than sufficient” bid-to-cover, “strong demand” and all the rest. And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.

They didn’t even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using “primary dealers” and “POMOs” and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.

The speed of the shell game is accelerating.

This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.

Caveat Ursi 3.0

Mole at EvilSpeculator has been following POMO activity for a long time. He drew up an awesome chart showing each burst of virtually free money the Fed pumps into the market (see story).  It’s not free to you and me. We pay the interest on it through inflation.  It is essentially free to prime brokers who use it to gun index futures while everyone is sleeping.

As you are probably aware I have long been keen on learning more about the inner workings pertaining to the NY Fed’s repo auctions and I have occasionally reported on the slosh available to preferred primary dealers. After a very pertinent article posted by ZH earlier this week I carefully combed through the recent POMO calendar, which due their traditional rarity I had foolishly ignored for several months now, and to my surprise arrived at highly interesting results:

Coincidence? You be the judge of that – I however took the liberty to highlight and mark each day a POMO operation was held.

Conclusion

There will be a day, maybe this year, when Treasury auctions don’t get enough bids. We know demand has been slipping, which is being inflated by the Fed. There are limits to how long the Fed can pump the market. When that day comes, this strategy on TBT/TLT will pay out in a massive and immediate way.

There was an iciness, a sinking, a sickening of the heart—an unredeemed dreariness of thought which no goading of the imagination could torture into aught of the sublime. What was it—I paused to think—what was it that so unnerved me in the contemplation of the House of Usher? -The Fall of the House of Usher by Edgar Allan Poe

The following story will explore how the Cayman Islands, home to 52,000 people, also houses nearly one foreign corporation per citizen.  It is also home to virtually all of the world’s hedge funds. The Caymans is being used by corporations to avoid U.S. taxes and hedge funds to illegally manipulate global markets. It goes without saying that the average citizen is not benefiting from this. In fact, now is a very critical time in history to expose this fraud. Let’s see why we should be unnerved while contemplating the House of Ugland.

Welcome to the Island of Zero

The house pictured above is home to international law firm Maples and Calder:

PO Box 309, Ugland House
South Church Street, George Town
Grand Cayman KY1-1104
Cayman Islands

This is a house used by 12 of the 30 companies listed in the Dow Jones Industrial Average to avoid U.S. taxes. President Obama referred to Ugland House a few weeks ago:

On the campaign, I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 businesses claim this building as their headquarters. And I’ve said before, either this is the largest building in the world or the largest tax scam. And I think the American people know which it is: The kind of tax scam that we need to end.

Basically everyone has known about this corporate game for decades. Now that the U.S. is strapped for cash this method of tax evasion is coming to the surface. The federal corporate tax rate is 35%. The effective tax rate of U.S. companies that shelter in the Caymans is one to five percent. In 2001, almost half of the money U.S. companies earned outside the U.S.—47 percent—was accounted for in offshore tax havens such as the Cayman Islands, which has no corporate income tax. What’s really unnerving is many corporations don’t pay any federal tax at all.

During last summer’s market mayhem this report didn’t get the traction it deserves. From Reuters:

The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.

More than half of foreign companies and about 42 percent of U.S. companies paid no U.S. income taxes for two or more years in that period.

During that time corporate sales in the United States totaled $2.5 trillion, according to Democratic Sens. Carl Levin of Michigan and Byron Dorgan of North Dakota, who requested the GAO study.

Four companies alone have accumulated a combined total of more than $75 billion in earnings untaxed by the U.S.: Hewlett-Packard Co., Merck & Co., Pfizer Inc. and Coca-Cola,

Here is the intro to the report the Government Accountability Office, Congress’s investigative arm, wrote to Senators Levin and Dorgan:

July 24, 2008
The Honorable Carl Levin
Chairman Permanent Subcommittee on Investigations
Committee on Homeland Security and Governmental Affairs
United States Senate
The Honorable Byron Dorgan
United States Senate

In response to your long-standing concerns about whether foreign-controlled U.S. corporations are abusing transfer prices and avoiding U.S. income tax, we compared the tax liabilities of foreign- and U.S.-controlled companies incorporated in the U.S. in three prior reports. We reported that from 1989 through 2000 foreign-controlled corporations were more likely to report zero U.S. income tax liability than U.S.-controlled corporations with a majority of both types of corporations reporting no liability.

Bloomberg recently ran a story about this featuring Seagate Technology, the world’s largest maker of hard disk drives, headquartered in Scotts Valley, California. Yet the documents it files with the SEC list its address on South Church Street in George Town, the capital of the Cayman Islands.

While the U.S. corporate tax rate is 35 percent, Seagate paid an effective tax rate of 5 percent in the year ended June 2008, according to data compiled by Bloomberg.

The Caymans have no corporate income tax for companies incorporated there. The Caribbean island has helped scores of U.S. companies, including Coca-Cola Co. and Oracle Corp., to legally avoid billions in tax payments to the U.S. government, says U.S. Senator Byron Dorgan.

Maples and Calder, owners of Ugland House, incorporated more than 6,000 new companies over the past five years. Back in 2004, the building served as home to 12,748 companies using the same address. This five-story office building on South Church Street is now the official address for 18,857 corporations. About half those Cayman companies had billing addresses in the U.S., according to a 2008 GAO study.

Intel Defense

Intel’s former vice president of tax, licensing and customs, Robert Perlman told the U.S. Senate Finance Committee in March 1999 that Intel would have been better off incorporating in the Cayman Islands when it was founded in 1968.

“Our tax code competitively disadvantages multinationals simply because the parent is a U.S. corporation,” Perlman testified.

He has a point. The U.S. is criticized for having one of the highest corporate tax rates in the world. This can place U.S. companies at a major disadvantage while operating in the same space as highly subsidized foreign competitors.

Then again, many of these companies avoiding taxes were being subsidized by the U.S. government at the same time. Twenty-four of the 100 largest contractors with the U.S. federal government—including Altria Group Inc., Oracle Corp. and Procter & Gamble Co.—have subsidiaries in the Caymans, according to a March 2001 report by the GAO. Those 24 companies received a total of $35 billion from the U.S. government. “They are shortchanging our country even as they profit from it,” says Senator Dorgan.

The Caymans provide near-total financial secrecy for companies, banks and accounts. There are more than 500 banks and trust companies with deposits of more than $1 trillion in the Cayman Islands, according to the Cayman Monetary Authority. That’s more deposits than there are in New York City, and the Cayman Islands are about one-third the size of NYC.

“When $250 billion of the $880 billion in foreign bank deposits within U.S. banks is attributed to the Cayman Islands, to connect the dots you’ve got to ask questions about the extent of tax dodging in that country and other tax havens,” Levin says.

One of the many problems with this behavior is the role of corporations in the U.S. capitalist system. They were designed to replace the need for socialized government welfare programs. The trend of corporations paying fewer and fewer taxes, while offering fewer benefits to their employees, with stagnant wages, is contributing to a breakdown of the free market. Nations are running out of money, corporations are bailing or failing, and real wages have not improved for thirty years. This is a good example of how citizens are being victimized by the system. It is not just the U.S. who is missing tax revenue from this scam.  Instead of enforcing the law and cracking down the political dictate is to spend more. This is a Mafia style business solution.

How Corporations Game Taxes

A practice called transfer pricing may be the key to how U.S. corporations avoid taxes in the U.S. and other countries, Dorgan says. The accounting practice lets companies buy and sell products and services with their own offshore subsidiaries and set prices themselves. Companies abuse transfer pricing by shifting profits overseas to avoid U.S. taxes, Dorgan says. They set artificially high prices for imports and artificially low prices on exports, he says.

In a March report on financial crime and international law enforcement, the U.S. State Department cited examples of transfer pricing abuses, without naming companies. It said one company claimed to import dish towels from Pakistan for $153.72 each; another reported it had imported briefs and panties from Hungary for $739.25 a dozen; a third claimed it had paid $4,896 a unit for metal tweezers imported from Japan. The report also cited a company claiming to export toilet bowls to Hong Kong for $1.75 each. The State Department report called those prices absurd and ridiculous.

The fabricated high prices of imports let companies report artificially high expenses in IRS tax filings. The exaggerated low prices of exports allow companies to report smaller profits to the IRS. “Criminal individuals, corporations and other enterprises engage in abnormal international trade
pricing that transfers value and/or reduces U.S. tax liability,” the State Department report said.

Transfer pricing abuses by corporations cost the U.S. Treasury $53 billion
a year, according to Professor John Zdanowicz of Florida International
University in Miami. He says tracking a product used in transfer pricing
transactions between U.S. companies and their subsidiaries in the Caymans
and elsewhere is difficult. “Where it really comes from and where it’s really going, nobody knows, because of the secrecy,” he says. The $53 billion in lost U.S. taxes results from more than $150 billion of profit from improper transfer pricing, Zdanowicz says. “It’s a $150 billion shell game,” he says. (Bloomberg)

How to Make Money with Terrorists

The laws to prevent abuse are there, but enforcement is virtually non-existent. It’s particularly difficult when they are obstructed by the highest office. In 2004 David Evans wrote a phenomenal piece for Bloomberg called The $150 Billion Shell Game. Here is an excerpt from the most alarming section:

On April 13, 2003, President George W. Bush accused Syria of having weapons of mass destruction. “We believe there are chemical weapons in Syria,” he said on the South Lawn of the White House. Secretary of Defense Donald Rumsfeld, appearing on CBS’s Face the Nation the same day, said busloads of Syrians were sent to Iraq to kill Americans. “Reasonable people don’t want to be associated with a state that’s on a terrorist list,” Rumsfeld said. “Who in the world would want to invest in Syria?”

Six weeks later, on May 31, Devon Energy Corp., an Oklahoma City–based oil and gas producer, entered a partnership with the Syrian government to spend $17 million to search for oil in Syria according to company filings with the U.S. Securities and Exchange Commission. Theodore Kattouf, then U.S. ambassador to Syria, attended the contract signing in Damascus. Devon channeled the business through a Cayman Islands subsidiary.

Devon’s work in Syria didn’t mark the first time a U.S. company won a contract through a Cayman subsidiary in what the U.S. called a terrorist state. A Halliburton Co. subsidiary sold $33.6 million in products and services to Iran in 2001, according to filings with the SEC. Vice President Dick Cheney was chief executive officer of Houston-based Halliburton, an energy services and engineering company, from 1995 to 2000.

Iran is blacklisted by the U.S. as a terrorist state, which means U.S. companies are forbidden from accepting contracts from Iran. The Halliburton unit that won the contract in Iran was incorporated in the Cayman Islands and therefore wasn’t subject to U.S. law, Halliburton says.

In February, the U.S. Senate Finance Committee, chaired by Republican Charles Grassley, sent a letter to the Treasury Department asking if Halliburton was being investigated for violating U.S. sanctions. The committee also wrote letters to ConocoPhillips and General Electric Co. asking about their revenue from terrorist states, including Iran and Syria.

Halliburton is the 30th largest military contractor, with fiscal 2001 federal contracts of $534.2 million, according to a March study by the General Accounting Office, the auditing arm of Congress. Halliburton has 13 subsidiaries in the Caymans, two in Liechtenstein and two in Panama.

General Electric, the world’s largest company by market value, has sold locomotives in Syria; in Iran, it sold medical equipment, provided oil and gas services and contracted to build hydroelectric generators, according to the Senate Finance Committee. ConocoPhillips, the largest U.S. oil refiner, runs a gas processing plant in Syria, the committee said. “We comply strictly with U.S. law in sales to Iran,” says GE spokesman Gary Sheffer. “If Congress decides to change the law, we’ll comply.”

“All of Halliburton’s business is clearly permissible under applicable U.S. laws and regulations,” says Wendy Hall, a Halliburton spokeswoman. “If Congress decides to change the laws and provisions, Halliburton will, of course, comply.”

Quick Hedge Fund Facts

So that’s the tip of the iceberg for international corporations legally abusing U.S. tax law. There have been famous cases of illegal abuse such as Enron. Back in December 2001, Enron Corp., the Houston based energy company that went bankrupt, used 441 Cayman affiliates to help hide $2.9 billion in losses.

To delve into what hedge funds do is another giant stinking pit of abuse and secrecy. Out of the total of 9,800 hedge funds operating at the end of the third quarter 2006 worldwide, 8,282 were registered in the Cayman Islands.

In 1993, the decision was made to turn this tourist destination into a major financial power, through the adoption of a Mutual Funds Law. This enabled easy incorporation and/or registration of hedge funds in a deregulated system. From the day of application, it takes two to five days for a hedge fund to be approved and costs $3,600 in total fees.

The number of hedge funds operating in the Cayman Islands exploded from 1,685 hedge funds in 1997 to 8,282 at the end of the third quarter 2006, a fivefold increase. Cayman Island hedge funds are four-fifths of the world total. Globally, hedge funds hold $1.44 trillion in assets under management, but through using leverage of anywhere from 5 to 20 times, they command up to $30 trillion of deployable funds. This equals the size of the NYSE.

CEO to Worker Pay

The point of all of this is to become aware of what is really going on when it comes time to raise taxes on the public.  This is going to happen.  It has to happen, because the U.S. is running out of money.  However, the money is out there.  It’s just not being legally distributed as it should be.  Instead the burden will be unjustly placed on you and me.  As long as the House of Ugland stands, our standard of living will fall.

The last concept related to all of this is the trend in CEO compensation. This is a visual demonstration of how we are being cheated by a corrupt system which is protecting itself to our severe disadvantage. The market collapse is doing nothing to change the gross inequality of the system. What the media typically avoids discussing is the effect inflation has on real wages. Basically, prior to the market crash it was impossible for most people to get ahead and beat inflation. If the market enters a long period of inflation along with higher taxes–forget it.

In 2005, the average CEO in the United States earned 262 times the pay of the average worker, who earned just $5.15 per hour.  This is the second-highest level of this ratio in the 40 years of recorded data. In 2005, a typical CEO earned more in one workday (there are 260 in a year) than an average worker earned in 52 weeks.

This extreme compensation ratio reflects both the extraordinary growth of CEO pay and also the diminishing value of the federal minimum wage that has not been raised since 1997. Adjusting for inflation, the purchasing power of the minimum wage is now at its lowest since 1955. When you hear rhetoric spew about why you have to pay your fair share, remember what you’ve learned here today.  This burden can only be carried for so long.

While I gazed, this fissure rapidly widened—there came a fierce breath of the whirlwind—the entire orb of the satellite burst at once upon my sight—my brain reeled as I saw the mighty walls rushing asunder—there was a long tumultuous shouting sound like the voice of a thousand waters—and the deep and dank tarn at my feet closed sullenly and silently over the fragments of the “House of Usher.” -Edgar Allan Poe

Sources:
London’s Cayman Islands: The Empire of the Hedge Funds
by Richard Freeman
March 11, 2007
Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations
1998-2005
July 2008
Study says most corporations pay no U.S. income taxes
by Donna Smith
Reuters Aug 12, 2008
Coca-Cola, Oracle, Intel Use Cayman Islands to Avoid U.S. Taxes
By David Evans
Bloomberg May 5, 2009
The $150 Billion Shell Game
By David Evans
Bloomberg Aug 2004
CEO pay: Sky high gets even higher
August 30, 2005
CEO-to-worker pay imbalance grows
CEO-Minimum Wage Ratio Soars
by  Lawrence Mishel

Just then the ship took a slight but definite plunge – probably a bulkhead went – and the sea came rolling along up in a wave, over the steel fronted bridge, along the deck below us, washing the people back in a dreadful huddled mass. Those that didn’t disappear under the water right away, instinctively started to clamber up that part of the deck still out of water, and work their way towards the stern, which was rising steadily out of the water as the bow went down. It was a sight that doesn’t bear dwelling on – to stand there, above the wheelhouse, and on our quarters, watching the frantic struggles to climb up the sloping deck, utterly unable to even hold out a helping hand.”
-Charles Lightoller, Second Officer aboard Titanic

Nearly 100 years ago to this very month the unthinkable happened. The “ship that could not be sunk” did so in such a manner it tore the very fabric of reality. Shortcuts were made in the design to maximize profits. These shortcuts were known to the men responsible for the tragedy. Some had warned about the doomed ship, but they could not be heard over the trumpets extolling its historic soundness. Such is the way of man.

Warning Before the Cruise

Trying to figure out what the financial end game is, beyond simple Armageddon, is probably impossible. Right now many conflicting issues don’t make fundamental long-term sense. This is a very complicated maze. However, being lost inside while searching for enlightenment seems a worthy task.

So here we are today, facing such a disaster on a scale unimaginable to people living in 1912. Once again shortcuts known to the men responsible will cause pointless deaths. That’s right, people will die. After Argentina’s 2001 financial crisis a gross majority of the country’s dead were children. Not unlike the Titanic’s third-class kids.

One of the most poignant aspects of the Titanic’s sinking was how the band played on until the final end. This is such a fitting analogy for several reasons. The first is the ship was redesigned down to minimum regulations. This did not leave enough life boats for every man, woman, and child. Secondly, many of her passengers refused to accept the fact the ship was sinking. Keep this in mind as we walk through reports of how badly damaged our financial behemoth is, and how poorly it is regulated (see story).

Much of what you’re about to read is complicated. So complicated it goes beyond the means of this lone author. This story has been sitting for weeks, not knowing exactly how to tell it. Please be patient and sort through it as you may.

Today’s Iceberg

We are on the cusp of another critical seizure in capital flow. An event that might sink the ship. If one of the major banks, or someone like Greece (who is on the verge of bankruptcy), becomes insolvent we’ll see a domino effect of collapses. There was a digital run on the banks last September which nearly froze the credit system. Liquidity is so tight now another run has even greater probability of breaking the system. There is more and more debt chasing fewer and fewer real dollars. Current policy makers believe there is no ceiling to short-term debt creation, baring a collapse. Their formulas tell them the Fed can print money indefinitely, because the Fed is ultimately capitalized. Others are convinced we will learn what the ceiling is before this decade is out.

The Titanic sinking took 2h:40m. The well informed passengers didn’t know for over an hour. Half the critical period was spent in denial. Our financial ship is crippled, but still making power. We all know it has been fundamentally damaged. What we don’t know is the crew jumped ship with the best life boats. Meanwhile we’re up on deck listening to the music play. This is beyond criminal. And most of the unfortunates are stuck down in steerage with no way out. History shows the ship was doomed to sink no matter what was done. If not that year, then another. The lesson learned was how to save the people. Maybe this info will help you save someone.

Where is the Liquidity

One of the logic traps is trying to figure out who is responsible for the system failing. A shark infested waters theory makes it nearly impossible to determine which predator struck first. Did the Fed engineer this. Did prime brokers manipulate the Fed first. Was there collusion to whip every last dime out of debt slaves. Who knows. Let’s look at what we do know, which they thankfully publish in plain sight.

Liquidity is to the capital markets what oil is to an engine. The engine is running out of oil. Even PPT Mobil 1 has performance limits. Here are some of the mechanical issues. Who else is watching the volume seize up on SPY, DIA, and the Qs? These are fundamental stocks with fundamental volume issues.

A lack of liquidity is one of the underlying reasons volume is leaving equity markets.  Liquidity is what gives us an orderly market less prone to price shocks, gap opens, and blatant manipulation.  Margin calls, collateral requirements, risk, and uncertainty has taken much of that liquidity away. Funds have blown up, prime brokers don’t exist in the same space anymore, and capital has made an exodus out of equities into derivatives. Money is moving out of the regulated markets into the unregulated markets. It is lack of regulation on insane amounts of leveraged credit that brought us here.

Thanks to Zero Hedge for their amazing investigative work:

The Capital Markets Liquidity Index subcomponents:

• The Capital Markets US Treasury Bill Index CPMKTLTBI
• The Capital Markets Short Term Large Certificates of Deposit Index CPMKTLCD
• The Capital Markets Commercial Paper Index CPMKTLCP
• The Capital Markets Agency Discount Notes Index CPMKTLDN
• The Capital Markets Banker’s Acceptance Index CPMKTLBA
• The Capital Markets Short Term US Treasury Bond & Note Index CPMKTLTBO
• The Capital Markets Short Term US Federal Agency Index CPMKTLTA
• The Capital Markets Short Term US Corporate Investment Grade Bond Index CPMKTLCBO

Goldman Monopoly

GTM’s (prior story) on how the tri-party repo system works is critical to understand. Since many of the banks funding that system are gone, or incapable of funding, one big shark is left in the lagoon–Goldman Sachs. How do you trade a market when a single entity controls a large and growing share of the daily volume? Goldman Sachs is running about one out of every ten trades on the NYSE.

The FINANCIAL — The New York Stock Exchange, a subsidiary of NYSE Euronext (NYX), on April 9 released its weekly program-trading data submitted by its member firms. The report includes trading in all markets as reported to the NYSE for Mar. 30-Apr. 3.

The data indicated that during Mar. 30-Apr. 3, program trading amounted to 32.6 percent of NYSE average daily volume of 3,343.7 million shares, or 1,089.0 million program shares traded per day.

“Program trading encompasses a wide range of portfolio-trading strategies involving the purchase or sale of a basket of at least 15 stocks,” NYSE reports.

In all markets, program trading by member firms averaged 3,389.9 million shares a day during Mar. 30-Apr. 3. About 32.1 percent of program trading took place on the NYSE, 0.8 percent in non-U.S. markets and 67.1 percent in other domestic markets, including Nasdaq, NYSE Amex and regional markets.

Goldman Sachs is one of 15 major program trading participants. This is one of many examples of GS increasing their stake in a shrinking space. Their principal program purchases of 850 million shares representing 81% of all traded shares, more than half of all NYSE reporting firms principal trades. Program trading accounts for 33% of all NYSE daily volume, and GS runs 30% of those trades.

Dark Pools and Iceberg Orders

That was just Goldman’s share of program trades on a regulated exchange, which doesn’t reflect the vast unregulated market. Dark pools have roughly 10% of all shares traded in the US cash equities market. Dark pools are not public markets. It’s a method to match trades outside of the public eye, and also do what would be illegal transactions in a regulated market. They can be used to reduce market impact when trading large orders. Dark pools of liquidity became very popular prior to the 2007 market top. Firms with buy ratings on stock XYZ could dump shares with little impact. Imagine how important they are today in an illiquid market. Dark pools are also used to game the public market. Trades like iceberg orders can show a 10,000 block sale as a 100 block print.  Read about the basics here.

Guess what bank holds the #1 spot in the dark pool arena? Goldman Sachs and their Sigma X pool, which transacted 156.3 million shares in February 2009. All the dark pool numbers in this data are single-counted. Morgan Stanley recently complained about market participants overestimating dark pool volumes–not so. February had a record number of dark pool transactions. This makes sense in a less than liquid public market doesn’t it. Of that record volume GS controls 15% of it. More evidence of Goldman Sachs having monopoly advantage in a wounded illiquid market. Predators like Goldman need equally skilled competitors to maintain balance of the system. Last summer GTM suggested this might happen (see story). The “crash the market to monopolize it theory” holds more water now.

Where Reality Sinks

As of last December, there is $1,400T (yes that’s quadrillion) sitting in interest rate swaps, mostly split between N. America ($775T) and Europe ($555T). This OTC market dwarfs the cash equities market. It’s hard finding exact global market figures, but NYSE Euronext is $31T. They move more than one third of global stock volume. The regulated U.S. stock market is roughly 2% of the size of the unregulated global derivatives market.

The picture is a decent representation of just how massive the unregulated derivatives market is.  It is not properly scaled for 2009, which is more akin to the Titanic next to a dingy.  Not only is this market massive, it has been growing at a reckless pace, is highly leveraged (over 400:1 in many cases), and is extremely complex.  Critics say the total 2008 derivatives markets value of $1,566,655 billion is misleading, because the number is notional.  Meaning it isn’t real money, but credit agreements between two parties where the principal is never exchanged.  Wasn’t that what AIG was doing in a perfectly safe manner?

Can we also assume a good chunk of those swaps are waiting for the Fed to raise rates? If this is true, we’re in a very precarious situation. On one hand the Fed has to print money until the end of days, and on the other roughly 75% of the world’s total liquidity is trading swaps on the rates. Note: This is a rough educated guess based on BIS numbers.

Some of the big boys in derivatives are using it to play catchup in lieu of their massive recent losses in equities.  The risky trades AIG was doing are still going on. And they’re being placed at an accelerated rate. Some are looking for a slam dunk when rates go back up.  That is not a guarantee and there is a ridiculous amount of levered credit expecting this to happen.

Also, the tri-party repo system has broken down. This might be the prime reason of lower intraday stock market volume, and what appears to be institutional abandonment of index ETFs like DIA/SPY/Qs.  The main entities which loaned money for margin trading, like JP Morgan, are in collections mode. It’s possible the Fed has run out of capital or the need to fund temporary open market operations. These funds are often used to trade index futures. The lack of TOMO activity this year is very curious. The PPT might be fundamentally ineffective for now. Then again they are not necessary during stock rallies. Time will tell.

Life Boats and End Times

Read Deepcaster’s summary of the shadow banking system for new doors to open and explore. You will be in shock. Seeing the actual numbers is madness. JP Morgan had $91 trillion in derivatives as of Sept. 2007. What do they have now after taking on Bear Sterns, which was naked shorted into oblivion before they could offload much of anything.

Each American household owes $455,000 on the U.S. National debt of $53T (pre-TARP). What’s the math on $1.5Q divided into massive global job loss, rampant inflation, and a doubling of the money supply every four years? How does a system that functions purely off the backs of debt slaves work when the slaves stop earning or can’t pay their debts? This feels like a mega tsunami is just offshore. And the guy who works the monitoring station got hit by a bus.

The financial industry is fundamentally doomed. Anticipate a large scale event that uses shock doctrine to control and manipulate people’s minds. Since WW II the ability to master groups and make them susceptible to brainwashing has been perfected. A massive bank collapse could be the catalytic event used to marginalize and control societies in a new direction.

Part 2 Thoughts

Last week John Stewart interviewed Elizabeth Warren. She is the Harvard Law professor (and bankruptcy expert) who chairs the Congressional Oversight Panel for TARP. Stewart asked, “So in your mind the banks don’t see this as a come to Jesus moment?” Watch the show and maybe you’ll be curious about when that day will come.

The next installment in this line will cover the Fed and their manipulation of “free market” liquidity. We’ll explore TOMO/POMO funding, gold manipulation, and PPT charts. There is a way to use TOMO data to go back in SPY volume and say, “See! This is where they pumped money into the market.” It is very time consuming, but it will be done.

Sources:
Greece on the Verge of Bankruptcy
By Manfred Ertel
BusinessWeek April 7, 2009
Why Some Dark Pools Are Increasing Their Volumes
By Nina Mehta
Traders Magazine March 13, 2009
OCC’s Quarterly Report on Bank Trading and Derivatives Activities
Fourth Quarter 2008
Market Intervention, Data Manipulation Still Accelerating
http://news.goldseek.com/GoldSeek/1214722800.php
http://www.finchannel.com/index.php?option=com_content&task=view&id=34403&Itemid=2
http://www.bis.org/publ/qtrpdf/r_qa0903.pdf#page=108
http://www.nyse.com/pdfs/PT041609.pdf

How Treasury Auctions Work

09:15 am : Though typically overlooked, participants will take note of a $24 billion 7-year Treasury Note auction, which is scheduled for this afternoon (1:00 PM ET). Given the weak showing in Wednesday’s 5-year Note auction, participants speculate that investors’ risk appetite may be changing.

Last night’s Frontline interview with Paul O’Neill:

Can the United States government go bankrupt?

Not in the classical sense, but we could get ourselves into a position where people won’t take our paper anymore. And that’s a really desperate position to be in when we’ve killed the idea of good faith and credit of the United States. That could destroy our society as we’ve known it.

Can’t we just turn the printing press on?

Nope, because at some point people will prefer to have broken pieces of glass than federal money. … Look at the German economy in 1923. People got paid twice a day in Germany in 1923, because if they waited to spend the money that they were paid at lunchtime at dinnertime, the money wouldn’t be worth anything.

And so people were actually willing to pay all of their money, a wheelbarrow full of money, for a broken piece of shiny glass, because the broken glass was worth more than a wheelbarrow full of money. We don’t want to get there, but semi-modern societies have gotten there.

You imagine we could get there?

No, because I think we’re smarter than that, and I don’t think we’ll let it come to that. But the answer to your question is, if we don’t do something, we could get there, yeah.

The United States has a AAA rating, just shines in the night. Could we lose that?

Eighteen months ago Citigroup had a AAA rating. Could they get there?

A bank isn’t the United States government.

No, I know, but you’re asking a very radical question: Could the federal government lose its AAA rating? And the answer is yes. We dare not let that happen, but the answer is yes.

If we keep going in a straight line, the answer will be yes?

Yeah. I don’t know how we dodge the bullet if we don’t change where we’re going. …

U.S. One-Month Bill Rate Negative for First Time Since December (Bloomberg):

Treasury 10-year yields have risen for the last five days as the U.S. sells a record $98 billion in securities this week to revive the economy. The note pared earlier losses after a government report today showed the world’s largest economy shrank the most since 1980.

For the time being, fears of supply have pushed up longer- term yields despite the Fed’s buyback program. The 10-year yield has retraced more than half of last week’s 47 basis point decline when the Fed said it would buy Treasuries.

The Treasury is selling $98 billion in notes this week as part of President Barack Obama’s efforts to boost government spending to revive economic growth. Debt sales will almost triple this year to a record $2.5 trillion, Goldman Sachs Group Inc. forecast. The firm is one of the 16 primary dealers required to bid at government auctions.

UK government bond auction comes up short:

Britain experienced its first incomplete auction of government bonds in almost seven years on Wednesday, potentially dealing another blow to Prime Minister Gordon Brown’s plans to resuscitate the faltering economy.

The bank has been buying bonds from banks to provide liquidity to the financial system.

Brown was further undermined on Tuesday by King, who warned that Britain may not be able to afford new expensive stimulus plans, noting that the country’s budget deficit is expected to swell dramatically due to the economic crisis.

Shore Capital analyst Tim Morgan said the government’s overall cash requirement, including the money needed to redeem previous gilt issues, could hit 240 billion pounds.

Morgan said that Britain was running a risk of a “debt vortex” in which markets lose confidence in the ability of the UK taxpayer to meet future obligations.

“It is by no means clear that this required sum can be realised, less still that it can be raised in sterling and at current low interest rates,” he said. “The only sure way to avert debt vortex risk would be to unveil major cuts in future public spending.”

My speech to Gordon Brown goes viral:

“Every British child is born owing around 20,000 pounds. Servicing the interest on that debt is going to cost more than educating the child.”

Last night’s Frontline interview with David Walker:

Let’s start with public debt. … Give me a sense of just how bad this is.

The national debt, as we speak, is about $10.5 trillion. But the real problem is not that number. … The number that we need to be focusing on is the total federal financial hole; that’s the total liabilities in unfunded promises for Social Security and Medicare. As of the end of 2007, which is the latest set of financials that we have right now, it was $53 trillion. That’s $455,000 per household. Median household income in America is less than $50,000 a year.

What’s clear is that, while the numbers aren’t final yet for the year ended Sept. 30, 2008, for the first time in the history of the United States, the federal financial hole exceeded the total net worth of all Americans. … So we could confiscate every dime of the net worth of every American household — including Warren Buffett, Bill Gates and every other billionaire — and we wouldn’t fill the hole.

And guess what? The hole is getting deeper more rapidly than our net worth is going up. In fact, net worth has been going down because of decline in home values and because of decline in the markets. So we’re in a deep hole, and we’d better start figuring out a way that we’re going to climb out.

Conclusion

The sobering reality is even if the U.S. manages to avoid a serious depression the looming unfunded anvil of Medicare and Social Security entitlements hangs over the country.  This may keep some of you up at night, but this is not a problem that lacks solutions.  If it is not dealt with before it becomes another managed crisis then it’s a massive problem.  What is clear is the U.S. has mastered the art of instant gratification while ignoring future threats to stability. What Americans seem to have forgotten is we own the country. This is our money and our future. No child should be born a debt slave. And no one deserves to be a slave at the expense of their education.

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning. -Sir Winston Churchill at Lord Mayor’s Luncheon following the victory at El Alamein in North Africa, London, 10 November 1942

In today’s spin doctored media maelstrom can China be more truthful than the United States? The following will uncover some reasons why CBS, Bernanke, the Fed, and other members of the power Elite are lying to you. We will then explore the mechanics of how a total Fed collapse can happen. And we’ll end with a review of how a stronger police state is being formed.

Official speeches to assure investors and prop up the markets have routinely come ahead of financial disasters. In January of 2008 Bush said the economy was “strong and solid.” That was the worst January open the Dow ever saw (see story). The same thing happened this last January with a hope filled new administration, and a new worst opening–ever. Here is part four of: Our Engineered Market Meltdown.

Notice the Timing

The timing of events during the last several days should be frightening, but the message in the U.S. is, “Don’t worry, be happy!” Do not underestimate the power of what China has said. This is unprecedented:

President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures. We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried. -Wen Jiabao 03/13/09

On Friday China questions the “full faith” of the U.S. dollar. What this means is they will not bail out the U.S. with non-stop purchasing of Treasuries, the blood of the financial body.

The Chinese prime minister, Wen Jiabao, spoke in unusually blunt terms on Friday about the “safety” of China’s $1 trillion investment in American government debt, the world’s largest such holding, and urged the Obama administration to offer assurances that the securities would maintain their value. (NY Times)

On Sunday Bernanke does the first national interview a Federal Reserve chairman has ever done in 96 years. He says everything is fine and we’ll be back to business as usual by the end of the year. Then on Wednesday the Fed announces they will buy Treasuries until the end of days. So…

1. China warns about the financial stability of the U.S.
2. Bernanke goes on national television
3. Says he’s from Main Street, just like you and me
4. Then boldly lies about the economy

Three days later…

• FOMC announces a final push of a desperate crisis management plan
• U.S. dollar sees its 3rd biggest one-day decline ever
• Fed is now matching all of China’s $1 trillion in Treasuries

CBS: A Tool of the Elite

What 60 Minutes did with Ben Bernanke is upsetting. It’s the same tactic that was used with Hank Paulson on Frontline. These are shill journalism puff pieces hero worshiping the architects of financial Armageddon.

A shill is an associate of a person selling goods or services or a political group, who pretends no association to the seller/group and assumes the air of an enthusiastic customer. The intention of the shill is, using crowd psychology, to encourage others unaware of the set-up to purchase said goods or services or support the political group’s ideological claims. Shills are often employed by confidence artists. The term plant is also used.

Dan Rather had been with CBS for decades and was one of the most familiar faces in American journalism. He refused to be a shill and was working on exposing G.W. Bush.

Eight weeks before the 2004 presidential poll, Rather broadcast a story based on newly discovered documents which appeared to show that Bush, whose service in the Texas Air National Guard ensured that he did not have to fight in Vietnam, had barely turned up even for basic duty. (Guardian UK)

He was fired by the network the day after the 2004 election. The war quietly went on and media criticism of Bush dropped. Now that his administration is gone Rather is suing CBS for $70M. This is a prime example of how compromised the national media is. Do not expect the truth from them.

What needs to be understood is we are seeing the mask of the system having peeled back. The reality is ugly, evil, and incomprehensible to the average citizen. AIG employees recently received a security memo warning them not to identify themselves to the public. So what do the Elite do? They humanize deceit and try to paint collusion as incompetence. They want the public to mistake strategy for incompetence. None of this is accidental. It has been planned for years. This crash was engineered and won’t end until it’s end game time. The end game is a new global banking monopoly.

What Fascism Looks Like Today

It’s a simple theme. Crash the market then monopolize it. Argentina was forced into selling their sovereign natural resources to international corporations at mafia discount prices. The U.S. is now selling its financial sovereign resources at mafia discount prices. Don’t think so? Paulson and Bernanke forced the remaining major banks to sign off on a fascist takeover of the country’s largest independent banks. From Frontline’s Inside the Meltdown:

NARRATOR: Then on Sunday, October 12th, something extraordinary. Paulson personally called the CEOs of the nation’s nine largest banks and told them to come to his office the next day at the Treasury building. Sheila Bair from the FDIC was there.

NARRATOR: The nine CEOs sat in alphabetical order across the table from Paulson and Bernanke.

JON HILSENRATH: You have Wells Fargo all the way at the end and you have Bank of America more towards another end. And you have, basically, the icons of Wall Street who are showing up.

NARRATOR: Paulson said the entire banking system was in deep trouble.

SHEILA BAIR: It was serious. It was somber. And the government did most of the talking.

JON HILSENRATH: It was made clear to these nine very powerful CEOs when they sat down at the table that this wasn’t a negotiation.

NARRATOR: Paulson hoped one bold act would boost the nation’s confidence in the banks and get them lending again, a direct infusion of cash.

MARK LANDLER: And then he basically came out and said it: “We want to take a stake in the largest banks in the country.”

NARRATOR: Paulson and Bernanke were offering each of the banks tens of billions. The government would become a major stockholder.

MARK LANDLER: And that then set off a pretty lively discussion.

DAVID FABER: Some of them were, like, “I don’t want the money.” But it was, like, “You’re taking the money.”

SHEILA BAIR: The government was very assertive. Treasury was very assertive on why the program was there, why they needed to take it with all the conditions.

DAVID FABER: “Here’s the plan. Here’s what we’re doing. Here’s what we need you to do. You’ll get the money in a few weeks.”

NARRATOR: Paulson gave each man a single piece of paper spelling out the conditions.

MARK LANDLER: Before they had to leave town that night, they were told, “Return this document with your signature on it.” And all nine of them did so.

NARRATOR: Paulson would spend $125 billion that day. Moral hazard was a thing of the past.

Bernanke Buys Bonds

Don’t forget that the Federal Reserve System is a private central bank. They are not the government and they do not represent American citizens. In fact they own the government’s ability to make currency. And they own you and me. It’s called debt slavery. The more debt they loan the more power they have. However, there is a major flaw in this fiat money system. To prevent a total collapse of the system the Fed is now purchasing debt on a massive scale. Depressions end when debt is finalized. The majority of debt hasn’t been wiped out, but transferred to central banks. Can an economy grow when a central bank controls the country’s GDP?

From David A. Rosenberg, BofA/MER’s North American Economist (a great read):

So, as the Fed’s balance sheet now expands to represent nearly 25% of GDP, we no longer have to ask the question as to whether or not we are just like Japan, for that is what the BoJ balance sheet looked like after the central bank embarked on its quantitative easing program nearly a decade ago.

The additional $1.15 trillion in announced purchases is likely to boost the balance sheet well in excess of $3 trillion, especially if you also include the recently expanded TALF program size of $1 trillion (there is also talk that the Fed is going to expand the TALF program to include distressed assets – in the press statement, it did say “the range of eligible collateral for this facility is likely to be expanded …”).

For the traders who watch DIA, SPY, and QQQQ there is a telling lack of volume in the recent rally. There appears to be an abandonment of index ETFs by major institutions. This seems to make sense with the Fed supporting bonds over equities.

How Shadow Banking Works

Many people have been fascinated by GTM’s story on How to Trade a PPT Day. One of the sticking points is where the money comes from to push the markets up so violently. The following is an amazing explanation of PPT mechanics. Understanding this will help you understand why the Fed is in trouble.

These are excerpts from The Federal Reserve is Bankrupt by Matthias Chang, former Political Secretary to the Prime Minister of Malaysia:

The repo market is the market whereby all financial institutions (regulated and unregulated) invariably go to obtain financing to meet reserve requirements, bridging finance, to lend or purchase securities, to hedge and or to invest on short-term basis.

It used to be that mainly US Treasuries (bear this in mind at all times) were used as security for Repo transactions, as it is considered as most secure i.e. as good as cash since it is backed by the credit of the US government!

This requirement is no longer the case. More of this issue later.

A deliver-out repurchase agreement is where securities are delivered to the cash lender for custody in exchange for cash.

A tri-party repurchase agreement is similar to a deliver-out repurchase agreement, except that the security is placed in the custody of a third-party entity. The third-party ensures that the security meets the cash lender’s requirements and provides valuation and margining services. This is the primary form of repurchase agreement for securities dealers in the United States. Bank of New York and JP Morgan Chase are the two main custodians or clearing banks in the US and supervise the vast majority of the tri-party repos. Bear this in mind at all times.

Okay, one quick note here. Lehman Brothers used JP Morgan for tri-party repos. Two weeks before their collapse JP Morgan issued a $5 billion collateral call on Lehman, who stalled for time. The next week JPM demanded a $5 billion all cash redemption from LEH. Between Sept 11-12th Lehman refunded $8 billion in cash. On September 15th they were out of business. (see Gasparino, Charles. “Losing Lehman.”Trader Monthly, Nov/Dec 2008.)

Repos can be of any duration but are most commonly over-night loans. Repos longer than over-night are called Term Repos. There are also Open Repos which are transactions which can be terminated by both parties on a day’s notice.

The largest players of repos and reverses are the dealers in government securities. There are about 20 primary dealers recognized by the Fed which are authorized to bid for new-issued treasury securities for resale in the market. The dealers are highly leveraged, 50 to 100 times their own capital. To finance the purchase of treasury securities, the dealers need to have repo monies in large amounts on a continuing basis. The institutions that supply such huge funds in the repo market are money funds, large corporations, state and local governments and foreign central banks.

How the Final Crash Might Happen

A killer tidal wave in the Atlantic is possible, but what Matthias Chang suggest will have a similar effect:

Recall that I had mentioned earlier that Federal Bank of New York and JP Morgan Chase were the primary clearing banks for repos.

The banks’ quarterly financial reports show that as of Dec. 31:

• J.P. Morgan had potential current derivatives losses of $241.2 billion, outstripping its $144 billion in reserves, and future exposure of $299 billion.
• Citibank had potential current losses of $140.3 billion, exceeding its $108 billion in reserves, and future losses of $161.2 billion.
• Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
• HSBC Bank USA had current potential losses of $62 billion, more than triple its reserves, and potential total exposure of $95 billion.

• Wells Fargo, which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion, below the banks’ combined reserves of $104 billion, but total future risks of about $109 billion.

The Fed’s rescue of Bear Stearns through JP Morgan was not so much to save the former but rather to shore up the “clearing system” of the repos for which JP Morgan Chase and the Bank of New York were the main pillars. One of the functions of a “clearing bank” for repos is to value and match securities tendered for cash borrowings. If Bear Stearns securities are now valued as junks, the integrity of JP Morgan and Federal Bank of New York as clearing banks in this market is as good as zero! And bearing in mind that the five major investment banks in the US rely heavily on the repo market for their funding, any gridlock in this part of the shadow banking system would tear wide open the entire banking system, including the traditional counter-part.

Hence, the FED intervention by the creation of the Primary Dealer Credit Facility (PDCF) which was in effect the backstop for all investment banking using tri-party repos!

This was what Bernanke said:

We have been working with market participants to develop a contingency plan should there ever occur a loss of confidence in either of the two clearing banks that facilitate the settlement of tri-party repos.

The inherent weakness of tri-party repos is that the counter-party risks of billions worth of funding agreements are shouldered by essentially two players – Federal Bank of New York and JP Morgan Chase.

1. Panic swept across the entire repo market.
2. No securities were considered safe enough for repos except US treasuries.
3. Fundings in the repo market grind to a halt.
4. Market players withdrew funds and began hoarding treasuries.
5. The rest who own structured products were slaughtered.

As has been observed, the Fed intervened aggressively to check the run on the repo market. Various measures were taken, but in my view the most dangerous was the widening of the collaterals which the Fed was willing to accept to secure funding of the players in the repo market. The Fed also intervened by lending a huge chunk of its US treasuries in exchange for junks to facilitate credit expansion.

In the result, what happened was that the Fed’s present balance sheet of approximately $2 trillion is made up mostly of junk securities.

The Fed is no different from banks in that confidence in the quality of its assets is critical and that if and when the market recovers, there is in fact a market for the junk assets that it took on to unravel the gridlock in the financial markets.

Remember Bernanke has stated numerous times the financial system depends on confidence of the participants. China loudly stated their lack of confidence last week.

When Joe Six-Packs realizes that the Federal Reserve Note is not even secured by US treasuries and or the FED has real tangible assets, but its balance sheet is littered with junks and toxic waste, there will be a run on the Fed i.e. when Americans and foreigners no longer have faith in the Federal Reserve Notes as “money”.

Nouriel Roubini declared:

The process of socializing the private losses from this crisis has already moved many liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued.

In my opinion, the Fed has already become “unglued”. Whatever guarantees given to secure the indebtedness of CitiGroup and others to prevent a run on these banks are useless.

What Will the End Game Look Like?

Minnesota National Guard Soldiers with the 1st Combined Arms Battalion, 194th Armor stand guard to assist police in maintaining order during demonstration Sept. 1, in St. Paul, Minn. The demonstrators were protesting during day one of the Republican National Convention. (Photo: Master Sgt. Edwin Holt)

David Rockefeller, Jr. and his contemporaries at the Bilderberg, Council on Foreign Relations, and Trilateral Commission want to see their global banking monopoly solidify before they die. These are internationalists working to destroy nation-state identity. The daily operations of these groups is to marginalize all threats against the power Elite.

In 2002 David Rockefeller, Sr. authored his autobiography Memoirs and states:

For more than a century ideological extremists at either end of the political spectrum have seized upon well-publicized incidents such as my encounter with Castro to attack the Rockefeller family for the inordinate influence they claim we wield over American political and economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as “internationalists” and of conspiring with others around the world to build a more integrated global political and economic structure – one world, if you will. If that’s the charge, I stand guilty, and I am proud of it.

And what they’ve been working on has been taking too long to materialize. Therefore expect a large 9/11 type catalytic event that will use shock doctrine to force compliance. Failure of any of the key central banks would also bring this about.

We will probably see the emergence of a stronger police state in the U.S. if their propaganda methods, like using Bernanke on CBS, continue to fail. We already saw mass arrests made during the RNC and DNC. And we’ve seen wave after wave of protests moving west out of Eastern Europe. Some people look at this as class warfare between the Haves and the Have-Nots. It is possible their accelerated plans will cause a new Sons of Liberty movement in the U.S. where a power struggle between an enlightened citizenry and the corrupt will take place. The reality is Earth has finite resources with exponential population growth. Something inevitably has to give under the current scarcity based system.

The United States House of Representatives has met in closed session seven times since 1825. The most recent closed session was held on March 13th of 2008 to discuss classified details of the Foreign Intelligence Surveillance Program during debate on the Foreign Intelligence Surveillance Act of 1978 Amendments Act of 2008.

Rumors leaked from that session warn of civil unrest, financial collapse, and protective measures for members of Congress. Several members have since spoken out against bully tactics and threats used by Paulson. He warned members of Congress that if the bailout bill wasn’t passed the U.S. would face total economic collapse and civil riots.

Another current issue to understand is the move to change the Posse Comitatus Act. After the U.S. Civil War it was illegal for the federal government to use the military for law enforcement. This stems from the British occupation and garrisoning of troops in civilian homes during the American Revolutionary War. After the LA Riots and Hurricane Katrina there have been power struggles to allow the U.S. Military to act as law enforcement on domestic soil. These have been thwarted, but there is a new concerning development. From the Army Times:

Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.

But this new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities.

They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack.

From the ACLU on the U.S. Army’s domestic deployment:

Well, you need to start with the Posse Comitatus Act, enacted in 1878 and it actually makes it a crime for the military to perform civilian functions within the country, unless there’s an explicit act of Congress.

As they say, it’s a slippery slope, and once you start going down the path of having the military deployed in the U.S. it gets harder to draw the limit. And again, it’s not the military, it’s the way that the military might be used by people to avoid certain protections, and certain civil liberties — for example, crowd control is an example how this could be used — how it could be wielded in ways that are dangerous, and that’s why it’s important to, before you take any step, so we know what the threat is, because it’s hard to go back once the line has been eroded.

This line of thinking might seem paranoid, and sure that could be the case. However, these are very real possibilities. The global financial system is closer than it’s ever been to a system wide collapse. For investors it’s probably wise to heed the grey line in Picture of the Year.

Sources:

China’s Leader Says He Is ‘Worried’ Over U.S. Treasuries
The New York Times March 13, 2009
CBS newsman’s $70m lawsuit likely to deal Bush legacy a new blow
The Observer, Sunday 28 December 2008
Ben Bernanke’s Greatest Challenge
Fed Chairman Discusses Recession, Financial Rescues And Recovery In Wide-Ranging 60 Minutes Interview
March 15, 2009
The Federal Reserve is Bankrupt
How Did It Happen and What are the Ugly Consequences?
by Matthias Chang
ACLU on the U.S. Army’s domestic deployment
Monday Oct. 27, 2008
As America Collapses US Government Secret Plans Revealed
Posted by indglass on May 21, 2008
BofA CEO Lewis: Bank Will Not Need More TARP Funds
By: Maria Bartiromo, Anchor | 06 Feb 2009
http://www.marketwatch.com/news/story/paulson-meet-us-bank-heads/story.aspx?guid={C3A179AE-940F-44DB-B3E5-434EFC87D1EA}
http://www.pbs.org/wgbh/pages/frontline/meltdown/etc/script.html
https://www.gpcresearch.ml.wallst.com/common/emaillink/pdf.asp?SSS_33E1CD86723A60F4C774F41FC5F2027E&pdf=pdf/Bernanke_buys_bonds.pdf
David A. Rosenberg
Brigade homeland tours start Oct. 1
Army Times, Sep 30, 2008

What is infuriating to many people is the SEC’s response to being called out by Ackerman.  They deflect, diminish, and claim executive privilege. Their response makes perfect sense when one understands the SEC is in bed with those who are gaming the system.  What’s also upsetting is this is a rerun.  The Senate met exactly one year ago to talk about the same issues! Last year GTM published two pieces from SEC whistleblower Garry Aguirre:

How Manipulators Game the Market

Our Engineered Meltdown: SEC Evidence

After having watched this video consider the following.  There is evidence of foreknowledge the crisis management team knew a crash was coming and allowed it to happen.  Gary Aguirre was fired from the SEC (right after a promotion) while investigating John Mack, just prior to his CEO appointment at Morgan Stanley.  This is an excerpt from one of his letters to the Senate.

Gary Aguirre memo to Senate Banking Feb. 13, 2008

Courtesy of: InvestigatetheSEC.com:

Re: Hearing on the of State of the United States Economy and Financial Markets

Dear Chairman Dodd and Ranking Member Shelby:

As the current credit crisis unfolds, investors and the public must rely upon your Committee to uncover its causes and scope. Your hearing on Thursday, The State of the United States Economy and Financial Markets, offers an opportunity to question those regulators who are responsible for protecting the capital markets from this evolving crisis. I respectfully submit there are two key questions that penetrate to the core ofthis crisis:

1) Why did counterparty discipline fail?

2) Why did the SEC stop an investigation three years ago that could have averted the subprime crisis?

I will try to put these questions into sharper focus with the context below.

Where is the SEC?

Over the past two months, the Wall Street journal, the New York Times, Reuters, CNBC and Forbes have all asked a single question: where was the SEC on subprime debt? Significantly, three years ago, the SEC was conducting an investigation that could have averted the subprime crisis. The investigation focused on Bear Stearns’ evaluation of subprime debt, the core issue in the current crisis. The investigation reached a point where Bear Stearns was told it would be charged. Then, for no known reason, the investigation was switched off. A recent Wall Street Journal article suggests that the effective prosecution of the Bear Steams case might have averted the subprime crises.

The Bear Steams investigation is stunningly similar to the SEC investigation of Pequot Capital Management which I headed. Like Bear Steams, the Pequot investigation appeared to be advancing towards a filing. Like Bear Steams, senior SEC management decided to halt the investigation. Like Bear Steams, the SEC was later forced to focus on the underlying abuse, but only after that abuse grabbed media attention. In Bear Steams, the underlying abuse was overvalued subprime debt. In Pequot, the underlying abuse was widespread insider trading by hedge funds.

We know why the Pequot investigation was stopped. According to a joint report by the Senate Judiciary and Finance Committees, a major investment bank, Morgan Stanley, retained an influential attorney who intervened at the highest level of the Division of Enforcement to stop the investigation. The two Senate committees concluded that senior SEC officials gave preferential treatment to a member of Wall Street’s elite and then fired the lead investigator (me) when he questioned that decision. None of the senior SEC officials who derailed the Pequot investigation were ever disciplined. Was the Bear Steams investigation stopped in a similar way? Did another influential attorney, hired by Bear Steams, place a call to a high-level official at the SEC?

Your Committee has oversight jurisdiction of the SEC. The SEC’s mission is to protect the capital markets and investors. It had a chance to protect the capital markets from the current subprime crisis three years ago, when it was investigating whether Bear Steams overvalued subprime debt. Why did the SEC call a halt to the Bear Steams investigation? Who made that decision?

Sincerely,

Gary J. Aguirre

"The Treasury Department is the executive agency responsible for promoting economic prosperity and ensuring the financial security of the United States." - Mission Statement

The following story was first published here at GTM in July 2008 when no one heard of Tim Geithner. He’s now about to take control of the U.S. Department of the Treasury. It is important to understand some of his past history. This is a history beyond tax evasion and public lies, even though his weasel-like behavior is consistent. The point is, Tim Geithner knew a market crash was coming and kept silent. Perhaps it was to allow his connections in JP Morgan and Goldman Sachs to profit and gain power. If I personally knew such things I’d be dead or too compromised to publish this.

There is one man who knows:

Last September The Washington Post showed how Geithner will become Paulson 2.0: In Crucible of Crisis, Paulson, Bernanke, Geithner Forge a Committee of Three

The media is now beginning to blame President Obama for socializing the monetary system. This is a myopic diversion from the truth. The system was designed to fail before Obama had any power. The U.S. financial system was gutted when Phil Gramm, his wife, and Tim Geithner (along with their minions) removed safety measures built into the financial matrix. In a few short years they tore down what took decades to build. See story.

Regulations used to be in place to prevent exactly what has happened. Gramm re-wrote the law and UBS made a quick buck, along with Gramm as their chief lobbyist. Geithner’s job when he took office at the NY Fed was to supervise counterparty risk in the derivatives market. That was five years ago. This man had oversight of a market twice the size of the U.S. economy. Can he now be trusted with your retirement money?

Using Crisis to Monopolize Fed Control [July 2008]

One topic retail investors hardly read about is the over the counter derivatives market. Credit default swaps between banks and hedge funds is one of the prime drivers causing the Wild West scene in financials. There is a ton of paper floating through the system with unknown market value. The results of this practice can be read on the front page of any financial paper today.

There is a theory that the PPT is fighting for their life against naked short selling and similar tactics used in the OTC market. It must be infuriating for them to pump nearly a trillion dollars of liquidity into the market to see it driven lower.

Enforcing the law to ensure proper short selling isn’t the only way the PPT is attacking the market and hedge funds that drive it. The New York Fed is pushing forward on July 31, 2008 with the next leg of a master plan. They are working to completely reform global OTC derivatives markets into a single central counterparty (CCP). This will put market control in the hands of 17 banks. Two prime brokers in the US market are Morgan Stanley and Goldman Sachs. Both are firms tightly linked to Washington.

Why OTC Paper Have Vast Unknown Values (See Chart!)

What is the Derivatives OTC Market?
“Credit derivatives have been perhaps the most important and successful financial innovation of the last decade.” (Acharya and Johnson)

Markets for credit derivatives have helped banks create synthetic liquidity in their otherwise illiquid loan portfolios. For example, Citigroup had distributed a large portion of its exposure to Enron through issuance of credit-linked notes at regular intervals (in the two-year period preceding default of Enron). The final effect of Enron’s collapse on the balance sheet of Citigroup was as a result small compared to the size of its loan exposures to Enron.

[This is a simple explanation of course. The real explanation is this market is so complex it’s beyond the comprehension of many insiders.]

Who Benefits? (from Gary Aguirre 2006)

Hedge funds execute up to 50% of the daily trading on the New York Stock Exchange. They also do 70% of the trading in the US distressed debt market, US exchange-traded fund market, and the convertible bond market.

Who also profits from hedge funds? The people they pay above market commissions to. Investment banks collected $15 billion either directly from hedge funds or because of them, producing $6 billion in profits.

Aguirre states, “For individual firms, hedge funds were critical to last year’s [2005] performance. They produced one-quarter of Goldman Sachs’s profits, estimates Guy Moszkowski of Merrill Lynch, and only a slightly smaller slug of Morgan Stanley’s returns.”

Times Change But Tactics Do Not

There is a potentially a predatory form of trading by hedge funds in the credit derivatives market: “It was the hedge funds creating a credit event by forcing the bond price down and trying to get the rating agencies to downgrade the company to benefit themselves: they were scaring everyone into selling.” (Henry Snedel, December 5, 2002, in Deals and Deal Makers, Wall Street Journal)

J.P.Morgan was offering $209,000 to buy credit default protection on a $10 million loan to Altria Group Inc.’s Philip Morris tobacco unit and was offering to sell that same contract to anyone for $221,000 – a difference of 5 percent – according to Bloomberg data. On the same day, J.P.Morgan was offering to pay $9,000 to sellers of protection on $10 million of newspaper publisher Gannett Co.’s debt while charging $21,000 to anyone who wanted to buy the same protection, a difference of more than 100 percent. (Bloomberg Markets “Credit Swaps, High Risks Few Rules” June 6, 2003)

Fed Preps for a CCP (from the NY Times –> Feb. 2007!)

Timothy F. Geithner took the helm of the Federal Reserve Bank of New York in 2003. High on Mr. Geithner’s to-do list is understanding and monitoring the $26 trillion credit derivatives market — twice the size of the United States economy — the fastest-growing financial market there is.

Even the heads of some of the world’s biggest banks seem overwhelmed by the size and complexity of credit derivatives. “It makes my head swim,” said Kenneth D. Lewis, the chief executive of Bank of America.

Mr. Geithner’s job, when he is not working on monetary policy, is to make sure they are prudently managing that risk.

When Mr. Geithner arrived at the New York Fed, E. Gerald Corrigan, a former Federal Reserve president himself, suggested that he look at the conclusions of the Counterparty Risk Management Group Report, the report compiled after Long-Term Capital. Mr. Corrigan thought it might be useful to look at those risks in the context of the rise of private money and the rapidly transforming credit markets.

In 2004, Mr. Geithner’s staff conducted an extensive review of counterparty risk. But rather than dump its conclusions on the industry, he chose to stay behind the scenes while encouraging Mr. Corrigan to reconvene the group. In January 2005, Mr. Corrigan brought together a group that included some of the most senior executives on Wall Street. Six months later, the group produced a report that made 47 recommendations on issues from the very technical to the philosophical.

Central to the report’s findings were shocking weaknesses in the way credit derivatives were being assigned and traded around without any sense of who owned what. The so-called “assignment issue” was simple: credit derivatives were negotiated by two parties, say JPMorgan and Goldman Sachs. But banks were “assigning” the contracts out to others — like hedge funds — without telling each other. It was a little bit like lending money to a friend who is really rich who in turn lends it to her deadbeat brother and fails to mention it.

“It violated the first and most sacred principle of banking: know your counterparty,” Mr. Corrigan said.

Standards were set, and backlogs came down sharply…The industry felt triumphant about being part of the solution. It was a classic “collective action” problem solved: the industry had set an abysmally low standard and no one would budge for fear of losing business, so someone had to move everyone.

Improving the processing of credit derivatives was only the first step. Soon after, he initiated a comprehensive examination of stress-testing, looking at how banks measure and test exposure to certain market players and market risks in different kinds of conditions, like the failure of one major firm.

When Long-Term Capital Management tottered on the brink of collapse in 1998, the credit markets in the United States were controlled by such a small number of institutions that the New York Fed had to make calls to 14 Wall Street banks to try to resolve the crisis. Today, the number of institutions would be vastly higher.

“The fact that the banks are stronger and risk is spread more broadly should make the system more stable,” Mr. Geithner said. “We can’t know that with certainty though. We’ll have a test of that when things next threaten to fall apart.” Regulators struggle to imagine what the shock could be, but do know that the reaction will be far different from crises of the past.

[Odd the Fed had no idea they would soon be swamped with debt obligations from mortgage backed securities after spending so much time on OTC market mechanics?]

What the Last CCP Meeting Determined (from Reuters)

Among the issues agreed upon were more automation and standardization of derivatives trade processing, and the development of a central counterparty, or clearing house, for credit default swaps, the Fed said. Central clearing houses, which backstop trades done by all participants, lower the risk that the failure of a single major market player can have a domino effect on markets and thus pose a systemic risk.

The proposals would cover a range of OTC markets, from equities, interest rates and foreign exchange to commodities. The 17 firms at Monday’s meeting represented more than 90 percent of credit derivatives trading.

Who Are Some of the US Banks?

[Two years after “problem solved” the Bank for International Settlements in March 2007 warned of the following Bear Stearns scenario.]

Glaring Weakness (BIS report)

The report concludes that, since 1998, the clearing and settlement infrastructure of OTC derivatives markets has been significantly strengthened. But further progress is needed in some areas:

• market participants should identify steps to mitigate the potential market impact of replacing contracts following the closeout of one or more major participants.

In addition, as the market infrastructure moves further in the direction of centralised processing of trades and post-trade events, several issues will assume greater importance:

• providers of essential post-trade services for OTC derivatives should provide open access to their services and should aim to achieve convenient and efficient connectivity with other systems

Markets for OTC derivatives are generally are less liquid than markets for exchange-traded derivatives, and traditional procedures for a CCP to handle a default may not be effective. When a participant defaults, the CCP terminates all of its contracts with the defaulting participant. The traditional procedures for handling a default, which are used by CCPs for most exchange-traded derivatives, call for the CCP to promptly enter the market and replace the contracts, so as to hedge against further losses on the open positions created by termination of the defaulter’s contracts. But if the markets for the contracts cleared by the CCP are illiquid, entering the market may induce adverse price movements, especially if the defaulting participant’s positions are large. Consequently, the application of traditional default procedures to illiquid OTC contracts may entail significant risk to the CCP.

Prime brokerage is a service offered by banks and broker-dealers to buy-side investors (typically hedge funds), and is built around financing funds’ positions and facilitating clearing and settlement of their trades. Traditionally, prime brokerage involved financing and securities lending services used by market participants taking long or short equity positions. Over time, the services extended to fixed income and foreign exchange markets. Most recently, a form of prime brokerage known as OTC derivatives prime brokerage has been developed and marketed almost exclusively to hedge funds.

Potential Fallout From a Fed Driven CCP (from RGE Monitor’s London Banker)

One such plan that strikes me as worrying is a master plan for reforming global OTC derivatives markets toward a single central counterparty (CCP). The planners are the big institutions that provide leadership to these markets – the New York Fed and its core constituency of top tier derivatives dealers. They have been meeting for some time, at least four occasions that have been disclosed, and are now rolling out their plan for centralized clearing of OTC derivatives.

One doesn’t have to be a conspiracy theorist to see that it is sensible for this small coterie to plan and execute a long term strategy that promotes their collective self-interest. It stands to reason that they would rather be more powerful than less powerful, more profitable than less profitable. It is not unreasonable to suggest that one means of preserving power and profits requires imposing “solutions” to each “crisis” that institutionalize their influence over markets they dominate.

Tim Geithner, president of the New York Fed, is the godfather of this plan. Geithner recently hosted a meeting for the chosen seventeen shareholders of the CCP at the New York Fed to push the plan into realization, setting a deadline for proposals of July 31st that leaves no scope for opposition or alternatives.

While I am happy to concede that there are real risks that are unaddressed in OTC derivatives markets, I am less happy to embrace a solution which would institutionalize huge power to manipulate these markets in the hands of banks which are themselves core dealers and prime brokers in these markets, accounting for 90 percent of trades.

If these seventeen banks, or a smaller subset of these banks, were to collaborate rather than compete, then they would be in a position to manipulate prices, manipulate credit, manipulate leverage, and manipulate margin calls for every traded commodity and every market counterparty. That would allow them to dictate who gains and who loses over time in these ill-transparent and under-regulated markets. If that manipulation were only exercised periodically and unpredictably, they would have very little risk of ever being challenged, investigated, prosecuted or sanctioned.

Think of the possibilities if such infrastructure were in unscrupulous hands. A target country would find their export commodities devalued until their resources were sold at bargain prices to the “right” multinational owners. A target counterparty would find their credit constrained at just the time when margins were raised or collateral devalued, making them a takeover patsy at a knockdown price and guaranteeing a swift profit to the lucky acquiror.

The Geithner CCP proposal strikes me as mandating a casino where the seventeen dealers at the seventeen tables own the casino, control credit, control the odds, control the deal and can determine who wins and loses. If your only choice is to go from one rigged dealer-owned table to another rigged dealer-owned table run under common management, that isn’t much of a choice.

Sources:

More CCCP Than CCP – Danger of a Rigged OTC Casino
by London Banker
Jul 11, 2008
NY Fed: dealers, regulators agree on OTC reforms
Reuters
Mon Jun 9, 2008 6:06pm EDT
Calm Before and During a Storm
New York Times
by Jenny Anderson
February 9, 2007
ISDA 23rd Annual General Meeting
International Swaps and Derivatives Association, Inc.
Vienna
April 15-17, 2008
New Developments In Clearing And Settlement Arrangements For OTC Derivatives
Committee on Payment and
Settlement Systems
Bank for International Settlements
March 2007
Insider Trading in Credit Derivatives
Viral V. Acharya and Timothy C. Johnson
May, 2005
Pass the Parcel-Credit Derivatives
The Economist
January 18, 2003
Testimony of Gary J. Aguirre, Esq.
Before the United States Senate Committee On The Judiciary
June 28, 2006
http://www.ny.frb.org/aboutthefed/orgchart/geithner.html

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.  We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together. -President Dwight D. Eisenhower

These prescient words were given during his Farewell Address to the Nation on January 17, 1961.

He warned us about the dangers of monopoly and how we must stay vigilant lest we forget and allow such systems to enslave us. Eisenhower was concerned that future leaders would not have the strength or experience to block the advance of corporate empire builders. The military-industrial complex, although it still uses bombs, has become more seductive. Today they use weapons of mass financial destruction. The first film details these methods. They also use food as a weapon and the second film will detail those.

Our financial markets are a clear example of monopoly at work; see JPM story, MON story and GE solar story. This market crisis has been engineered by deregulators; see Phil Gramm story. The goal is putting greater power in fewer hands; see meltdown story. They get the gold mine and we get the shaft.

The following videos will enlighten you to the methods corporations use to empower themselves and marginalize everyone else. This effects how you and I live every day. How much “daily news” actually impacts your daily life? This is real news. Let’s explore some of the methods behind the madness.

The Corporation

WINNER OF 26 INTERNATIONAL AWARDS including the 2004 Sundance Film Festival.

The Corporation has emerged to be today’s dominant institution, one that creates great wealth but also great harms. This documentary examines the history of the corporation and the role it plays in society and our everyday lives. They are artificial creations to produce profit sometimes likened to an eagle, a whale, or a Frankenstein monster out of control.

Le Monde selon Monsanto

On March 11, 2008 a new documentary was aired on French television (ARTE – French-German cultural TV channel) by French journalist and film maker Marie-Monique Robin, The World According to Monsanto – A documentary that you won’t see on American television. The gigantic biotech corporation Monsanto is threatening to destroy the agricultural biodiversity which has served mankind for thousands of years.

The results of her three years of research worldwide into Monsanto:

The World According to Monsanto

Parting Thoughts

Multinational Monitor recently published: The 10 Worst Corporations of 2008.

There are many morals to the stories highlighted here at GTM. Something to think about is how you and I participate as investors. There are many ways we subvert our self-interest every day. Some of them we can’t do much about, like paying Federal Income Tax. One of the things we do have power over is where we put our money. Whose hands do we place it in?

This is an amazing resource and archive of free documentaries:

Some great resources exposing Monsanto and world food monopoly:

“Monsanto is big. You can’t win. We will get you. You will pay.” –Seed Police agent

Monsanto had a big day on earnings news and people were clamoring to jump on board. Prime example of a dangerous Wall Street philosophy: “Hey, we’re making tons of money so we don’t care about the consequences of what we’re doing. We’ll deal with that when the time comes.” What the financial press won’t discuss are the ethics of investing in MON. Have you thought about what it means to invest with war profiteers?

Originally this was going to be a piece on the technical merits of shorting MON, but there is a higher moral imperative here. A theme at GTM is the retail investor taking it to the man. If there’s ever an epic poster child for The Man (evil corporate entity) it is Monsanto. There are many fundamental reasons why this company should taste our steel. This article will explore some of corporatocracy’s pervasiveness, and why shorting MON could be psychologically satisfying.

This is going to be a slam piece. That’s right I said it. I’m saying it to all MON longs. Monsanto deserves to be shorted into oblivion. If you eat processed grains that are not organic, you are likely eating Monsanto genetically modified food (which is banned in Europe for safety concerns). Almost every sugar-free product on the market is a Monsanto money maker. If your snack has soybean oil in it, you are certainly drinking from the Monsanto tap–a poisoned source.

Monsanto got their start in 1901 selling saccharin to a Coca-Cola addicted public. Questions arose about the safety of saccharin, and the U.S. Department of Agriculture tried to ban it. They failed in their effort against the Monsanto lobby machine. Saccharin poisoning lead to my grandfather’s death from colon cancer. How many grandparents has Monsanto killed? Ironically, Monsanto’s founder John Francis Queeny died from cancer, possibly saccharin poisoning–poetic justice. The modern version of saccharin is sold as NutraSweet. The chemical is aspartame which Donald Rumsfeld sold to Monsanto earning $12M off the stock. The Bush Administration has been dubbed the Monsanto Cabinet for all their connections to the company. Got your attention now?

We’re going to cover a short background on Monsanto and explore why their world food production monopoly is dangerous. See our prior story on monopoly in Argentina for similar policies. The main quoted source in this article is from the Pulitzer work of Barlett and Steele published in Vanity Fair. Their story is called Monsanto Harvest of Fear.

Let’s start with the Monsanto party line:

As an agricultural and technology company committed to human rights, we have a unique opportunity to protect and advance human rights. We have a responsibility to consider not only how our business can benefit consumers, farmers, and food processors, but how it can protect the human rights of both Monsanto’s employees and our business partners’ employees. — Hugh Grant, Monsanto, Chairman, President and Chief Executive Officer

What’s so Bad About a Chemical Company?

Okay, all fine and good on the surface, but is this trustworthy. Monsanto is after all an American institution. Its safety glass protects the U.S. Constitution and its synthetic fibers are the basis of AstroTurf. However, if they’re such a great company, why did they completely rebuild their corporate image in 2002. By the late 1990s Monsanto rebranded itself into a “life sciences” company and spun off its chemical and fibers operations into a new company called Solutia. Then after additional reorganization Monsanto re-incorporated in 2002 and officially declared itself an “agricultural company.”

Check out the price history of Solutia vs. Monsanto:

It’s as though the original Monsanto, the company that long had the word “chemical” as part of its name, never existed. One of the benefits of doing this, as the company does not point out, was to channel the bulk of the growing backlog of chemical lawsuits and liabilities onto Solutia, keeping the Monsanto brand pure.

Short List of Grievances Against Monsanto:

1. 1917 US government suit against Monsanto over the safety of saccharin
2. 1965-1972 UK landfill illegal toxic waste dumping
3. Agent Orange chemical warfare +5M people poisoned
4. 1979 dioxin chemical spill Kemner v. Monsanto longest civil jury trial in U.S. history
5. Responsible for 56 contaminated Superfund sites
6. Anniston, Alabama mercury and PCB-laden waste discharged into local creeks over 40 years
7. Terminator seeds that lead to world food shortages, poverty, and death
8. Recombinant Bovine Growth Hormone Posilac (rBST) (rBGH)
9. Using coercive tactics to monopolize world markets
10. Pursuing 500 cases annually against customers for “seed fraud”
11. Andhra Pradesh Government vs. Monsanto on India seed price fixing
12. Department of Justice and SEC criminal and civil charges for international bribing
13. False advertising for “biodegradable” Roundup weed killer
14. India child labor abuse in the manufacture of cotton-seeds
15. India farmer suicides +150,000 and counting
16. Corporate tax evasion at Sauget, Illinois facility
17. Campaign against dairies which do not inject bovine growth hormone from advertising

Who is Monsanto?

“If you’re talking about PCBs, Agent Orange, Bovine Growth Hormone, water privatization, biopiracy, untested/unlabeled genetically engineered organisms, or persecuting small family farmers, you’re talking about the Monsanto Corporation.” -Organic Consumers Association

Monsanto was founded on chemicals in 1901, starting with saccharin and aspirin, and continuing post-WWII with the most toxic substances ever created by man — PCBs (polychlorinated biphenyls, the stuff we once used in air conditioners) and dioxin (a by-product of creating herbicides and pesticides). And let’s not forget Agent Orange, the defoliant that deforested Vietnam and is linked to veterans’ mental and physical health problems. Monsanto’s chemical past is responsible for over 50 Superfund cleanup sites, including two of the nation’s largest in Nitro, West Virginia and Anniston, Alabama.

From 1929 to 1971, Monsanto’s Anniston works produced PCBs as industrial coolants and insulating fluids for transformers and other electrical equipment. Today, 37 years after PCB production ceased in Anniston, and after tons of contaminated soil have been removed to try to reclaim the site, the area around the old Monsanto plant remains one of the most polluted spots in the U.S. A biologist conducting studies for Monsanto in streams near the Anniston plant got quick results when he submerged his test fish. As he reported to Monsanto, according to The Washington Post, “All 25 fish lost equilibrium and turned on their sides in 10 seconds and all were dead in 3½ minutes.”

On January 1, 2002, New Year’s Day, The Washington Post carried a front page report on Monsanto’s legacy of environmental damage in Anniston, Alabama. Plaintiffs in a pending lawsuit provided documentation showing that the local Monsanto factory knowingly discharged both mercury and PCB-laden waste into local creeks for over 40 years. In a story on January 27, The New York Times reported that during 1969 alone Monsanto had dumped 45 tons of PCBs into Snow Creek, a feeder for Choccolocco Creek which supplies much of the area’s drinking water. The company also buried millions of pounds of PCB in open-pit landfills located on hillsides above the plant and surrounding neighborhoods.

Agent Orange Challenge

See if you can watch all five minutes start to finish and how it makes you feel about investing in Monsanto:

Monsanto might be most famous for its history with dioxin. Agent Orange is the code name for a powerful herbicide and defoliant used by the U.S. military in its Herbicidal Warfare program during the Vietnam War. An estimated 21,136,000 gal. (80 000 m³) of Agent Orange was sprayed across South Vietnam, netting Monsanto vast profits.

The U.S. Department of Veterans Affairs has listed prostate cancer, respiratory cancers, multiple myeloma, type II diabetes, Hodgkin’s disease, non-Hodgkin’s lymphoma, soft tissue sarcoma, chloracne, porphyria cutanea tarda, peripheral neuropathy, and spina bifida in children of veterans exposed to Agent Orange as side effects of the herbicide.

Vietnam veterans and their families who brought the original Agent Orange lawsuit 25 years ago alleged that the government “is just waiting for us all to die.” They alleged that most of those still alive would succumb to the effects of toxic exposure before the age of 65. U.S. veterans obtained a $180 million settlement in 1984, with most affected veterans receiving a one-time lump sum payment of $1,200.

Vietnamese citizens exposed to Agent Orange got a double-edge sword.

According to Vietnamese Ministry of Foreign Affairs, 4.8 million Vietnamese people were exposed to Agent Orange, resulting in 400,000 deaths and disabilities, and 500,000 children born with birth defects. This chemical has been reported to cause serious skin diseases as well as a vast variety of cancers in the lungs, larynx, and prostate. Children in the areas where Agent Orange was used have been affected and have multiple health problems including cleft palate, mental retardation, hernias, and extra fingers and toes.

In February 2004, the newly formed Vietnamese Association of Victims of Agent Orange (VAVA) filed a class action law suit in a New York court, against Monsanto. On March 10, 2005, Judge Jack B. Weinstein – who had defended the U.S. veterans victims of Agent Orange – dismissed the suit, ruling that there was no legal basis for the plaintiffs’ claims.

In June 2001 Monsanto was accused by farmers of Ninh Thuan province of pressuring them to use genetically modified seeds that resulted in corn and maize crop failures and economic ruin.

Monsanto representatives responded with demands and threats urging the authorities to take action against by the state-run Nguoi Lao Dong newspaper (The New Worker) in Saigon, which printed a story about the farmers complaints, based on research done by social scientist Bui Dac Hai.

Agent Orange activists were outraged that Monsanto had returned to haunt Vietnam. Former wartime ambassador Madame Nguyen Ngoc Dung, told CorpWatch: “We have strongly criticized officials responsible for granting a license” (to Monsanto).

The activists say that Monsanto has been assiduously cultivating technocrats inside the ministries of trade, investment and planning, who prefer to put the war totally behind them and believe that any campaign over Agent Orange undermines good trading relations with the US, and is therefore bad for business.

World Seed Domination

“Whoever provides the world’s seeds controls the world’s food supply.” -Barlett and Steele

For nearly all of its history the United States Patent and Trademark Office had refused to grant patents on seeds, viewing them as life-forms with too many variables to be patented. But in 1980 the U.S. Supreme Court, in a five-to-four decision, turned seeds into widgets, laying the groundwork for a handful of corporations to begin taking control of the world’s food supply. Since the 1980s, Monsanto has become the world leader in genetic modification of seeds and has won 674 biotechnology patents, more than any other company, according to U.S. Department of Agriculture data.

Some farmers don’t fully understand that they aren’t supposed to save Monsanto’s seeds for next year’s planting. Others do, but ignore the stipulation rather than throw away a perfectly usable product. Still others say that they don’t use Monsanto’s genetically modified seeds, but seeds have been blown into their fields by wind or deposited by birds. It’s certainly easy for G.M. seeds to get mixed in with traditional varieties when seeds are cleaned by commercial dealers for re-planting. The seeds look identical; only a laboratory analysis can show the difference. Even if a farmer doesn’t buy G.M. seeds and doesn’t want them on his land, it’s a safe bet he’ll get a visit from Monsanto’s seed police if crops grown from G.M. seeds are discovered in his fields.

Monsanto’s fierce reputation for enforcing its patents and suing anyone who allegedly violated them. They go after farmers, farmers’ co-ops, seed dealers—anyone it suspects may have infringed its patents of genetically modified seeds. As interviews and reams of court documents reveal, Monsanto relies on a shadowy army of private investigators and agents in the American heartland to strike fear into farm country. They fan out into fields and farm towns, where they secretly videotape and photograph farmers, store owners, and co-ops; infiltrate community meetings; and gather information from informants about farming activities. Farmers say that some Monsanto agents pretend to be surveyors. Others confront farmers on their land and try to pressure them to sign papers giving Monsanto access to their private records. Farmers call them the “seed police” and use words such as “Gestapo” and “Mafia” to describe their tactics.

Investigators will say, “Monsanto knows that you are saving Roundup Ready seeds, and if you don’t sign these information-release forms, Monsanto is going to come after you and take your farm or take you for all you’re worth.” Investigators will sometimes show a farmer a photo of himself coming out of a store, to let him know he is being followed.

“Monsanto spends more than $2 million a day in research to identify, test, develop and bring to market innovative new seeds and technologies that benefit farmers,” Monsanto spokesman Darren Wallis wrote in an e-mailed letter to Vanity Fair.

What they don’t say is how most of their products have no independent testing. They tell you everything they make is safe and will save money, they submit it to the FDA for a rubber stamp, and their claim goes unchallenged until people get sick or die. When Monsanto faces blowback they pull out all the stops to block the truth.

Their 2008 annual report shows $5B in sales on Roundup and $6.4B in sales on seeds. Monsanto’s environmental and litigation reserve is $272M, roughly half the cost of yearly R&D. They spent over $6M in 2008 lobbying in Washington, D.C. which puts MON in the upper tier of corporate lobbying.

Of the many forms of suffering Monsanto has spread across the globe the latest is starvation. Every day, almost 16,000 children die from hunger-related causes–one child every five seconds. Today our world is home to 6.6 billion people. In 2005, almost 1.4 billion people lived below the international poverty line, earning less than $1.25 per day. They can not afford to purchase food from an international corporation, nonetheless buy suicide seeds Monsanto pushes through a monopoly system. This is corporate bio-warfare targeting defenseless people. Selling seeds that die after one harvest while destroying indigenous crops is a massive global crime. Part of the sad irony is America has turned into the oppressor it fought a Revolutionary War against.

What is Corporatocracy?

This beauty of eternal Calvin wisdom was written over 15 years ago about the auto industry. It still applies today, as it applies to Monsanto.

John Perkins was quoted in our prior story about the banking industry. What he warns of will be featured in Clive Owen’s new movie The International.

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 Halliburton, and the next moment he’s Vice President of the United States.” -John Perkins

A Monsanto official told the New York Times that the corporation should not have to take responsibility for the safety of its food products. “Monsanto should not have to vouchsafe the safety of biotech food,” said Phil Angell, Monsanto’s director of corporate communications. “Our interest is in selling as much of it as possible. Assuring its safety is the FDA’s job.”

It would be nice to think the FDA can be trusted with these matters, but think again. Monsanto has succeeded in insuring that government regulatory agencies let Monsanto do as it wishes.

Take a look:

Rumsfeld was chairman and C.E.O. of the pharmaceutical maker G. D. Searle & Co. when Monsanto acquired Searle in 1985, after Searle had experienced difficulty in finding a buyer. Rumsfeld’s stock and options in Searle were valued at $12 million at the time of the sale.

They even had L. Paul Bremer (the guy who headed Iraq between the fall of Saddam and the time the elected government took over) order that “farmers shall be prohibited from re-using seeds of protected varieties.” And we wonder why Iraqis are struggling to appreciate American intervention.

The list of other connections runs long and deep. Several staff attorneys held positions at the FDA and EPA with the common theme of: “Work for Monsanto, get a cushy job in the government for long enough to promote Monsanto products like GMOs or growth hormones, then go back to Monsanto.”

Two standouts, however, are Don Rumsfeld and Clarence Thomas. Thomas, once a lawyer for Monsanto and now Supreme Court Justice, helped steer a patent-rights case through the high court, benefiting Monsanto and other seed companies that tinker with nature.

But that harm was done by the “Original Monsanto Company,” not “Today’s Monsanto Company” (the words and the distinction are Monsanto’s). The Monsanto of today says that it can be trusted—that its biotech crops are “as wholesome, nutritious and safe as conventional crops,” and that milk from cows injected with its artificial growth hormone is the same as, and as safe as, milk from any other cow.

Final Thoughts

They said saccharin was perfectly safe. They said dioxin was perfectly safe. They say Roundup Ready genetically modified (GM) food is safe, but every living thing near it dies. Monsanto products are historically plagued with cancer fallout. One of their most egregious acts is refusal to account for the 3.5M people currently suffering from dioxin poisoning, or acknowledge those who died from Agent Orange. Still trustworthy and worth giving money to?

Monsanto’s CEO says they are a company committed to the protection and advancement of human rights. What he means is Monsanto is committed to the control of those “rights”. Taking food away from humanity to feed livestock and fill gas tanks is barbaric policy. It makes sense if the policy is designed to kill people and reduce world populations. This is a dark subtext to Monsanto’s game plan.

They are selling genetically modified seeds which kill indigenous crops, creating a world monopoly controlling food supply, and driving farmers to suicide. It’s my understanding that GM and Roundup Ready seeds do not increase yield over time, but show a bell curve yield. Transgenic cotton, and other GM seeds, are prone to viral infection and crop failure. Also ground saturated in Roundup poisons future crops and surrounding wildlife. These products destroy eco-diversity.

Another critical issue is destruction of generational planting seeds, like corn in Mexico. Their indigenous seeds become contaminated with Monsanto GM seeds subsidized by the U.S. which is forced into local fields.

All this boils down to Monsanto controlling too much of the world’s food supply. This is more powerful than using bombs or guns. They control the food so they control the people. With this food hegemony they can marginalize with impunity, which is being done in India, Mexico, and S. America. The policy of Monsanto is to inflame bio-warfare with viral GM seed infestation. Taken to the extreme farmers will not be able to save seed or continue sustainable agriculture. Monsanto says they are a food company. Are they profiting by feeding or killing?

Sources:
Monsanto’s Harvest of Fear
Vanity Fair
May 2008
by Donald L. Barlett and James B. Steele
Monsanto Seed Police | Big Brother is Watching
May 6, 2008
Agent Orange Victims Sue Monsanto
http://www.corpwatch.org/article.php?id=11638
http://en.wikipedia.org/wiki/Agent_Orange
http://www.purefood.org/monlink.html
http://www.monsanto.com/responsibility/human_rights.asp
http://www.organicconsumers.org/articles/article_14926.cfm
http://www.monsanto.com/pdf/pubs/2008/annual_report.pdf
http://www.bread.org/learn/hunger-basics/hunger-facts-international.html
http://www.sourcewatch.org
http://www.globalresearch.ca
http://news.bbc.co.uk/2/hi/business/4153635.stm
http://www.combat-monsanto.co.uk