Rigging the Markets – How They Do It

Friday, May 14, 2010
By Paul Martin

by Joel Skousen, Worldaffairsbrief.com
FinancialSense.com
May 14, 2010

While the rest of the financial world struggles, it might seem strange that four of the largest US banks have made record profits this past quarter—and not just on average, but every single trading day. Too good to be true? Indeed. No one can do this consistently unless they are part of the special group of insiders that are allowed access to market information at the exchanges that no one else has. In fact, normal people get sent to jail for trading on inside information, but not these guys. They are even able to execute trades after hours. Even during regular exchange hours they are given priority to execute trades based on foreknowledge of what others are about to do, which allows them to go short or long in the markets to take advantage of known future trading volumes. With access to almost unlimited low or zero interest money from the FED, or using naked shorts (illegal for others) and naked hedges they can also drive the markets in either direction and profit from those predictable moves. The financial world is starting to wake up to this rigged system, but can do nothing about it. The manipulators collude with high level regulators, the Treasury and the FED. It is also doubtful that a controlled Congress and judiciary will do anything to stop it. Predictably, even the new Supreme Court nominee, Elena Kagan, has a history of playing along with establishment powers, both financial and political. That’s why she is being groomed for the high court.

Addressing the growing outrage. Jonathan Weil of Bloomberg comments on the obscene profits the big banks are reaping from this rigged system: “Score another triumph for the rigged- market theory. In a feat that would seem to defy the odds, Goldman Sachs, JPMorgan Chase and Bank of America this week each said its trading desk made money every day of the first quarter. Goldman said its daily net trading revenue topped $100 million 35 times last quarter out of 63 trading days. JPMorgan and Bank of America disclosed similar eye-popping stats. Citigroup, too, recorded a profit on each trading day, Bloomberg News reported, citing unnamed people who knew the results.

“The intrigue is high. If a too-big-to-fail bank’s traders were able to make money every day of a quarter, were they really trading in any normal sense of the word? Or would vacuuming be a more accurate term? What kinds of risks do such incredible profits entail, for the banks and the rest of us taxpayers? [no risks at all] And are results such as these too good to be true? There seems to be no satisfying way to answer those questions, or even the more basic inquiry: How exactly do these banks’ trading divisions make money? Reading the companies’ impenetrable financial reports is of little help. However they did it, the data suggest it was as easy last quarter as hitting the side of a barn with a baseball from three feet away. This isn’t the way ‘trading’ works in the real world. A simple exercise in measuring probabilities is instructive here.

Cliff Kincaid covered how last week’s 1000 point drop in the stock market was manipulated. “The major media say the chaos on Wall Street was the result of a ‘trader error, possibly a typo,’ as the Washington Post put it. Some reports claim the culprit was a ‘fat finger’ on a computer somewhere that pressed the wrong key. But Zubi Diamond, author of the Wizards of Wall Street, says these claims are all lies. ‘What happened in the market on Thursday is a typical example of pure market manipulation’ by unregulated hedge fund short sellers.

“His book warns that the same hedge fund short sellers were behind the financial crash of 2008 that paved the way for Obama’s election to the presidency [that conspiracy was owing to powers even higher than money]. Diamond says the historic market plunge on Thursday was ‘due to computerized hedge fund short selling because there is no protection for the invested capital in the equity markets. There is no uptick rule, no circuit breakers [actually there are some, but they are so mechanical and predictable that they are easily circumvented] and no trading curbs. Our market is primed for manipulation.’ Diamond is referring to financial regulations, which have been repealed, designed to prevent market manipulation. Diamond has been adamant in his view that the financial reform bill being pushed by Obama and liberal Democrats on Capitol Hill will do nothing to solve this problem and regulate the hedge fund short sellers.’ No one will come on TV to tell the truth,’ he complained. Instead, he says representatives and apologists for the hedge fund short sellers, who operate as the Managed Funds Association (MFA), ‘go on TV and provide false explanations of what happened.’

“Diamond says that the repeal of the safeguard regulations, such as the uptick rule, circuit breakers and trading curbs, and the introduction of the short ETFs (Exchange traded funds), which began under Christopher Cox at the Securities and Exchange Commission, has given the members of the MFA tremendous power and influence. He says these individuals include George Soros, John Paulson, Jim Chanos, James Simon, and other hedge fund short sellers, including those who operate Quant Funds and engage in computerized trading. ‘They have the ability to manipulate U.S. and some international markets,’ he says. Indeed, Diamond maintains that the MFA has basically taken control of the U.S. stock market.

“‘The only financial reform needed today is to regulate and monitor the hedge funds and the hedge fund short sellers, some of them which are registered off-shore to avoid scrutiny. These global operators, with investors who remain mostly anonymous, must be compelled to register with the Securities and Exchange Commission (SEC), publicly disclose their positions in the markets, and maintain accounting and trading records for a period of 10 years so their activities can be monitored and scrutinized. Just like mutual funds, they must be prohibited from engaging in day trading activities.’

“‘What happened on Thursday happens to a select group of individual stocks on a daily basis as the hedge fund short sellers prey on common investors,’ he asserted. ‘They are now expanding the manipulation to include the whole market. They can now crash the market, panic shareholders out of their stocks, buy to cover their short positions for hefty shorting profits, and then buy back in at the bottom to open long positions and then recover the whole market (indexes) to normal levels.’ These market manipulators, he notes, have the ability to drive prices down and then drive them back up, all within a 15 minute period. ‘How’s that for no-risk investing?’ he says. ‘They make money through stock price volatility and market volatility. They manipulate stock prices through unrestricted short selling.’”

ZeroHedge.com explains through Jim Rickards why derivatives and naked shorts are such a danger: “Jim Rickards, who recently has gotten massive media exposure on everything from the JPM Silver manipulation scandal, to the Greek default, was back on CNBC earlier with one of the most fascinating insights we have yet heard from anyone, which demonstrates beyond a doubt why any attempt by Europe to print its way out of its current default is doomed:

“‘Look at what Soros did to the Bank of England in 1992 – he went after them, they had a finite amount of dollars, he was selling sterling and taking the dollars, and they were buying the sterling and selling the dollars to defend the peg. All he had to do was sell more than they had and he wins. But he needed real money to do that. Today you can break a country, you don’t need money you just need synthetic euro shorts or CDS [which don’t require any real money to execute]. Goldman can create 10 trillion of euro shorts. So it just dominates whatever governments can do. So basically Goldman can create shorts faster than Europe can create money.’ Just wait until Europe finally realizes that the CDS ‘speculators’ had all the cards in the poker game all along [having foreknowledge of what the EU Central bank and the IMF were going to do relative to Greek debt]. And we hope Europe listens to the man.”

WHY THE GREEK BAILOUT DOESN’T SOLVE ANYTHING

The EU has simply thrown a trillion dollars at the problem to make the symptoms go away temporarily. But the debt is still there, and no increased economic engine of production has been facilitated or enhanced. The austerity measures, even if sufficient (which they are not), cannot be implemented given the massive power of the unions and benefit corrupted public employees and welfare recipients. Entrenched socialism won’t allow real cut backs in government spending—at least sufficient to eliminate the need for more debt and fiat money creation

John Browne of Euro Pacific Capital explains: “As the health of much of the global economy weakens on a daily basis, political leadership increasingly ignores the source of the malady and instead focuses on short term ‘band-aid’ remedies. These measures which may buy a few months, or years, of relative well being, will convince the public that problems have been solved and will thereby take pressure off governments to make the needed structural changes. The recently announced $1 trillion EU bailout is a perfect example of this ‘band-aid’ approach.

“The just concluded general election in the United Kingdom is another. The inconclusive UK result, which creates a Conservative/Liberal Democrat coalition, will be an unhappy, unquestionably temporary arrangement. Similarly, the EU bailout will continue to infuriate Northern Europeans, who may ultimately push for a breakup of the Union. NuLabour (what the center-drifting Labour Party of Tony Blair has been branded) took a spectacular beating as a result of the clumsy stewardship of now former Prime Minister, Gordon Brown. Mr. Brown, whom I knew as a political bruiser in his early days in the House of Commons, had led Britain far down the road to economic ruin. As a very powerful Chancellor of the Exchequer under Tony Blair, he introduced many stealth taxes to finance a wave of high government spending. Seemingly operating as an unelected Prime Minister, he unleashed massive spending programs and interfered with UK banks in ways that worsened the effects of the financial crisis. After Brown formally succeeded Blair in June of 2007, he soon became one of the most unpopular Prime Ministers in more than a century.

“The fact that David Cameron and the Conservatives were unable to capitalize on this weakness to secure a massive victory must be seen as a major failure. Furthermore, Cameron was so anxious for personal power that he accepted a power sharing arrangement with the Liberal Democrats, a party with many key views to the left of NuLabour. This will lead to damaging compromises that, over time, will likely threaten both his parliamentary and grass roots support. Indeed cracks already are showing in the Conservative ranks. The fragile coalition likely will have little appetite for the tough economic decisions that need to be made, including the adoption of austerity measures that must surely accompany any meaningful attempt to curb the unhealthy deficit. This political paralysis will leave the UK increasingly exposed to default and economically ruinous inflation.

“Those deemed to be responsible for any continued economic weakness will likely to be voted out in the next election, which could come as soon as 12 months. Labour’s status as the opposition party may be brief. In short, personal ambition has driven Cameron to fall into a major political trap. He would have been well advised to shun a coalition and leave the political costs of acute austerity and abject poverty to a NuLabour/Liberal Democrat coalition who would be cast out at the next election, leaving a much stronger and unencumbered Conservative Party in power for years to come [the writer doesn’t understand that the Tories are just as controlled as the Labour party and that this coalition is specifically designed to poison real change and make sure the public doesn’t drift further toward non-state solutions].

“The massive EU/ IMF band-aid to insulate default contagion will likely share a similar fate. The move, which will prevent the needed restructuring of the EU’s ‘Club Med’ countries, will destroy the Euro and unleash massive inflation [eventually, but not in the short term]. The furious spike in gold prices in the days after the EU capitulation indicates the depth and breadth of this consensus. Worse yet, in exchange for sowing the seeds for disunion, the bailout will achieve nothing significant. The package may well insulate Greece from market default for some 18 months, but it will do little to change Greek habits.

“Even at almost a trillion dollars, it will prove insufficient to meet the likely cumulative needs of Portugal, Spain, Italy, Ireland, France and the UK. Furthermore, despite their leaders’ willingness to protect the Club Med and the cohesion of the EU, the German population is increasingly angry. Indeed, as a result of her support for the Greek bailout, Chancellor Merkel suffered a serious electoral setback on May 9th. In short both the UK conservatives and the EU appear to have been so tempted by achieving or retaining political power within their failed economic models that they have fallen into electoral traps that likely will threaten their political survival within the coming year. They may have bought themselves some time, but little else.” Good analysis.

Bob Chapman of The International Forecaster is also very negative on the long-term strength of the Euro and I think he’s right. The Euro has been seriously destabilized. “Greece has its immediate financing. Now the question is can they follow the prescription? In all likelihood the answer is no. The bond markets are reflecting that via a lack of confidence. In fact, some bond markets are falling apart and there is no end in sight. We have bond rating firms lowering ratings, as the rating services themselves are under serious fire and we do not believe they will be around long. The big question is why did it take two years and 10 months to react?

“There are 19 nations with serious sovereign debt problems and there is really no way back for them. They may as well all default, because the austerity programs they’d have to follow and at the same time to satisfy creditors, not only is impossible but it signals years of stunted growth and perhaps in many cases the possibility of revolution. Greece certainly fills that bill. We see the eurozone rules may soon be changed, so that eurozone participants can assist one another. That means in time they will all collapse together. As many as five members could need assistance of the 16 in the zone. Our guess is permanent bailouts will go forward and the ECB rules will be changed to allow the ECB to function like the Fed. Greece and many others are trapped and they will burden the healthy nations and neutralize them.

“This approach is the ECB nuclear option. It will destroy the zone eventually [don’t count on it. The globalists will use these crises, above all, to talk people into further consolidations of centralized government]. This will destroy the euro and end the option of the euro becoming the world reserve currency. The zone would have adopted the same approach as the US and UK in destroying their currencies. How can you have a union with one interest rate, where the ECB controls the monetary policy, but cannot control the budget deficits, borrowing and spending activities of its members [the key reason why Greece and other countries have used debt to evade their inability to inflate their own Euros—a power they lost when they gave up their own currency and joined the monetary union]?

“The Keynesian dictum of borrowing and spending has led the eurozone into a black hole. What will emerge from that black hole will be something similar to the Federal Reserve. The psychology behind all this is a move to make the US dollar again preeminent as a world reserve currency.” Interesting how the US dollar as weak as it is given the high rate of monetary inflation is gaining on other currencies—only because the other currency’s ability to inflate and get away with it are weaker.

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