Thursday, April 23, 2009

Covert Market Operations?

We all know that the twelve members of the FOMC (the Federal OPEN Market Committee) meet eight times a year in private to decide what their OPEN market operations will be in the interim between meetings. The FOMC was created two months after the gold confiscation of 1933 by the Banking Act of 1933 (also known as Glass-Steagall) at the height of the banking crisis. The hope was that it would stabilize the banking system. The FDIC was also created by that same act.

And we also know that at the latest FOMC meeting on March 17-18 they decided to begin OPENLY purchasing long-term Treasury securities, up to $300 billion worth. This is the boldest OPEN market operation ever, as it signifies an open monetization of official US debt even if its stated purpose is to help the housing market by lowering interest rates. The FOMC will meet again next week on April 28-29.

So I think it is fairly safe to say that OPEN market operations have hit historic levels in the past 6 months.

But what about COVERT market operations?

I want to avoid sounding like a conspiracy nut here, so I will focus only on the facts.

On March 18, 1988, President Ronald Reagan signed Executive Order 12631 creating the President's Working Group on Financial Markets. Like Glass-Steagall, this act was a reaction to a crisis. In this case, the crisis was in the stock market. Ronald Reagan created this group as a direct response to "Black Monday", the October 19, 1987 collapse of the stock market with the goal of "maintaining investor confidence". This "Working Group" is a kind of FCMC (Federal COVERT Market Committee), consisting today of Timothy Geithner, Ben Bernanke, Mary Schapiro of the SEC and Michael Dunn, chairman of the CFTC. (Special note: Barack Obama's nominee for chairman of the CFTC is Gary Gensler, "former Goldman Sachs employee and derivatives cheerleader", currently being blocked in the senate.)

In an October 27, 1989 article in the Wall Street Journal titled "Have Fed Support Stock Market, Too", a former Federal Reserve Board member Robert Heller opined that "Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole."

In a January 1997 speech given in Belgium, Alan Greenspan said the Fed could use "direct intervention in market events."

In a 2006 London Telegraph article titled "Paulson Reactivates Secretive Support Team to Prevent Markets Meltdown", George Stephanopoulos, former Clinton aide is quoted saying the Working Group has "an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem."

In 2001, the London Observer reported that "the Fed, supported by the banks, will buy equities from mutual funds and other institutional sellers if there is evidence of panic selling in the wake of last week's carnage."

In March 2002, the FT quoted an anonymous Fed official saying the Fed was considering "buying US equities", and that they could "theoretically buy anything to pump money into the system", including "state and local debt, real estate and gold mines, any asset."

Then in May 2002, the Australian Financial Review attibuted a 234 point surge to this secretive group, saying "There is a belief that this team represents a powerful and secretive hand that is ready to act any time the Dow looks ready to tank big-time." [1]

Now I'm sure that there is plenty that goes on behind the scenes within the hallowed chambers of Wall Street and Washington, DC. But I have identified three main periods of market activity during the past year that have a particular stench.

The first runs from July 15 through September 15, 2008. I chronicled my observations in the post Connecting the Dots:
July 11, 2008 – INDYMAC bank is seized by the FDIC.

July 14, 2008 - This document is signed by the Comptroller of the Currency and the Director of the Office of Thrift Supervision.

July 15, 2008 - It is also signed by the Secretary of the Federal Reserve and the Executive Secretary of the FDIC.

July 16, 2008 – The above document is released which tells banks how much capital they must have. This is an international issue known as the Basel II Accord. It requires banks to be properly capitalized or else foreign (European) banks will be forbidden from doing business with them. These guidelines must be met by the end of the fiscal year, 2008, which is September 30, 2008.... TODAY!

July 15, 2008 – Gold again peaks, stocks hit new lows, and the PPT along with the world's Central Banks go into action. For the next two (2) months, stocks go up, the dollar goes up, and gold goes down. This is a massive intervention effort to give the remaining banks a chance to get in compliance with Basel II. To get recapitalized. Which didn't quite happen like they hoped.

The second period runs through September and October of 2008, when US Treasuries staged an unbelievable rally, ironically called a "flight to safety". Jim Willie describes this questionable period in Gold and Treasury Feeder System:
Notice how the primary impetus behind the supposed USTBond rally was the mountain of purchases this past autumn by the USGovt and UKGovt, as seen in the Caribbean banks, where their fingerprints are often found without any mention in the press whatsoever. The US & UK illicit games conducted in Caribbean banks is given cover from hedge funds and Arab accounts, but not enough to hide what is really happening. In July 2008, the Caribbean bank center ledger item showed $117 billion in USTreasurys. By October 2008 the amount zoomed up to $204 billion. This is not Bermuda and Bahamas redeeming sea conch shells, molasses barrels, and salvaged marine vessels for USTreasury Bonds. These are games played by the syndicates running the central banks.

The bigger question is whether USTBonds were purchased with newly printed money. Clearly they were in my view.

Indeed, Jim, this is the biggest question of all.

The third and final questionable period I will highlight started March 9, 2009 and continues today. It is the ongoing stock rally in midst of a really ugly reality.

Tyler Durden over at Zero Hedge has been beating the drum that Goldman Sachs seems to have an unusually high level of "participation" in this rally:
This is getting surreal. Goldman principal program trading is now well over 5x compared to its customer and agency trades and a 150 million share pick up compared to last week. For yet another week, Goldman's principal trading represents more than half of all NYSE member firm principal transactions.

And from Helena Handbasket in the comments section:
GS traded more than 50% of all trades initiated FOR THEIR OWN ACCOUNT, but that volume (1B shares) was 20% of the total traded on the exchange. As in everyone. 1 in 5 trades on the exchange were initiated by Goldman for their own benefit.

On April 18, Zero Hedge posted The Visible Hand with a 2005 report from Sprott Asset Management exposing the PPT (The President's Working Group). This report is a great read on the subject, but what I found more interesting were a couple comments below the post, presumably by a floor trader. For some reason the first comment was subsequently deleted, but Hat Tip to alek_a for preserving it here on this blog:

[First Comment (deleted)]: It's just an article from years ago confirming the PPT. I didn't read it but here is the real truth.

These days there is no single entity, rather there are 6 large hedge funds located in the Reston Virginia, and DC area who are the commercial accounts.

The commercial accounts take their direction from either the Treasury or Fed depending on which branch has the lead. These hedge funds are the ones placing large orders to GS, JPM, etc... Market moving orders. So when you hear that 'paper is buying' large quantities on the floor you cannot really tell who it is and all you can do is speculate. It looks like it's coming from GS but they are just executing an order for a client. There is no trail back to Uncle Sam.

Do you really think the government would go directly to GS or JPM to place orders? That is laughable. Anyway the end result is the same, you are all getting gamed.

And our hero Tyler is the only one who is exposing the `real` truth so stay tuned to Zero Hedge.

[Second Comment]: The Reston6...

The big block orders(market movers) come into the pit through paper. When I ask paper(GS, JPM,etc) who are they buying or selling for there are 6 funds that always are referenced. The Reston 6.

(Here is an aerial photo of PJM Capital near Reston, Va. Possibly a front operation for the President's Working Group according to the commenter.)

Jesse's Crossroads Cafe describes the recent action in the S&P500 with a bit of asian color:
The action in the SP futures market has been particularly heavy handed and blatant since the heads of the money center banks met with the Community-Organizer-in-Chief at the White House. This market is being shoved around like a gaijin granny on the Tokyo subway in rush hour...

These kinds of COVERT market operations require immense sums of money to pull off. Money that certainly does not come from the sale of Treasuries if they are using it to also buy Treasuries. Think about it.

The Caribbean Treasury purchases in September and October alone were at least $80 billion. So where does this money come from? Sea shell sales? Let's see what Ben Bernanke had to say about this on November 21, 2002:
"...the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."

I ask you this; If they are crediting dollars electronically in order to manage the markets, what does this mean? What are the implications? Would this not be bigger than Watergate? Is this not like cheating at poker?

And what about the temptations? Where is all this money ending up? Who is profiting? And who is losing?

And if something like this were credibly exposed, if someone blew the whistle, what would be the consequences? What would China do?

Is a market rally worth the risks? How about the possibility of a resumption of public confidence? Is that worth the risk? Perhaps only private profits are worth a risk like this, assuming it is even happening.

Then again, does it really matter how this is being funded? Or is it simply the appearance of impropriety without credible explanation that really matters? Someone wise once said, "As I've matured, I've learned that it takes years to build up trust, and it only takes suspicion, not proof, to destroy it."


[1] Quotes sourced in "Bad Money" by Kevin Phillips


Anonymous said...


FOFOA said...

Thanks Anonymous!

That IS breaking news. Reminds me of my post:

"So how much gold does China really have?......."


Anonymous said...

China gold :

1.000 ton to 5.000 ton !

Belgian gold(scrap) recycler/refiner Umicore, states that the enormous demand for goldcoins cannot be served !

The $-regime is again buying some more time & $-goodwill with freezing the goldprice as to offer the opportunity for the global goldmetal accumulators to store their wealth (buying power).

First it was to please the oil owners, the $-regime wants to please the dollar owners with the same gold-reserve-wealth.

On the road (trail) to freegold !

Anonymous said...

Washington meeting :

Maybe we can suggest that the following should be read between the lines : Keep the brutal forces away from the exchange rates,...and let them go for the goldprice !?

FOFOA said...

Thanks Anon,

The floating exchange rate system as it is today, without a counterbalance, is the plague of the system. It creates a conflict of interests. On the one hand, you want your currency to be weak as it makes the economy appear strong. On the other hand, you don't want prices to rise too fast or your domestic economy suffers.

In this system, currencies don't so much float as they just sink at different rates.

The strong dollar policy only stretches the already-stretched rubber band even farther. When it breaks, it will be painful for those who advocated this policy.

The policy of managing exchange rates requires cooperation, which is becoming more and more difficult as the crisis proceeds.

The SDR talk is only a diversion in my opinion. It will ultimately end up being the survival of the fittest in the currency world.

I don't see any sustainable policy suggestions coming out of these non-stop meetings. It's like a flat world convention, exchanging ideas on how to get rid of those pesky people saying the world is round.


FOFOA said...

Jim Sinclair says...

Dear CIGAs,

We have to give credit to Martin Armstrong. April 19th certainly did have merit as a cycle point. Now let us see what June provides. Use Alf for "Price" and "Martin" for Time."

I agree and make but one small correction...

"We have to give credit to Martin Armstrong. April 19th certainly did have merit as a cycle point. Now let us see what June provides. Use Another for "Price" and "Martin" for Time." ;)


Anonymous said...

my guess is they are using the social security trust fund. getting yield higher than treasuries.

just my guess. i actually emailed treasury last year recommending they do it when the yield was high

Anonymous said...

That's a joke, right?

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