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Structured Finance: Price Manipulation Includes Silver and Gold (Part One)
August 17, 2013
Janet Tavakoli
Price manipulation is a time-honored tradition in structured finance. There will be abuse anytime there is a price “fixing” or a price set on the basis of a trade.
Instances of abuse are the dragons that “regulators” are supposed to constantly slay. When regulators are too slow, unwilling, or unable to do the job—and if you haven’t been paying attention, regulators have been all three for decades—market professionals take matters into their own hands.
Price manipulation: Business as Usual
Breathless financial media reports focus on “scandals” as if they are extraordinary or shocking events, instead of business as usual. If you trade metals, any commodity, interest rate swaps, foreign exchange, futures, options, CDOs, credit derivatives, stocks, bonds, or any other financial instrument, expect price manipulation. Within limits, price manipulation is tolerated in every financial market.
If you’re a market professional, your job isn’t to express shock or outrage at the existence of price manipulation. Your job is to figure out how much is being done, and how it is being done. If it were easy, we wouldn’t call it work.
Litigation Is a Game to Market Players
Your outrage is better directed elsewhere. So-called regulators, executives, supervisors, and managers make egregious price manipulation dead easy instead of slaying these inevitable dragons. Laxity simply enables and encourages manipulation.
William K. Black has supplied a speechless market with the proper vocabulary. In a criminogenic environment, control fraud is an expected outcome. In a control fraud, bonus-seeking employees will manipulate financial markets, even if it damages their own financial institution, the host upon which the parasites feed.
In August 2007, Jamie Dimon, CEO of JPMorgan Chase, told me litigation is a game to him. The only thing that interests him is whether the other side is “good for it.” This was in the middle of a discussion about flawed CDOs and growing problems at AIG, thirteen months before it required a massive taxpayer-funded bailout. JPMorgan wasn’t a key counterparty of AIG (Goldman Sachs and cronies were), but it was the top U.S. bank in credit derivatives. AIG’s woes posed systemic risk to the entire credit derivatives market.
Since then, JPMorgan lost money on a massive coal short, larger than the entire coal market, in the commodities unit headed by Blythe Masters. The bank manipulated this important market while the U.S. is at war. It was reported because it was a big loser. You don’t hear about the big manipulated winners.
Masters was allegedly a key player in the manipulation of electricity prices according to the Federal Energy Regulatory Commission (FERC), and she allegedly committed perjury. It’s likely she would have faced criminal charges had JPMorgan not paid FERC a $410 million penalty. Other banks are fighting FERC’s fines, but their officers weren’t accused of lying.
JPMorgan’s “London Whale” losses show that CEO Jamie Dimon is willing to downplay a potential $1 billion loss and call it a “tempest in a teapot.” (See: “Dimon Saw $1 Billion Potential Loss When He Made ‘Teapot’ Remark,” by Michael J. Moore and Dawn Kopecki, Bloomberg News, June 13, 2012.) He also didn’t disclose that at the time of his comment, losses had a reasonable chance of ballooning by multiples, and they subsequently did. Many finance pros and bloggers called Dimon out in real time on this nonsense, but regulators act as if it wasn’t Dimon’s responsibility to know better than to make public misleading statements.
Meanwhile, JPMorgan’s problematic CIO unit was a poster child for risk management worst practices—contrary to JPMorgan’s signed financial filings—and credit derivatives prices were actively manipulated. LIBOR fixing involved several banks. Main stream financial media reports this as a news flash. Yet this is no surprise to anyone who has been in the interest rate markets for more than a month. Banks colluded on prices of mortgage loans, credit derivatives indexes, synthetic collateralized debt obligations, CDO-squared and more, and the price fixing was even more blatant.
By the time Congress holds a hearing to wag a finger in an executive’s face (right after lauding him), by the time a fringe-dwelling show-trial is launched by the SEC and DOJ, by the time a junior scapegoat is indicted, the damage to investment portfolios will be fully realized. The lesson here is that you are on your own.
Market Pros Gang Up On Manipulators, If They Can
What do market professionals do when a market is being manipulated and “regulators” are ineffective? First, here’s what they don’t do. They don’t wring their hands and stress about how mainstream media seems to take dictation from banks’ PR firms. Instead, they proactively solve their own problem.
By the way, this is why market manipulators cover-up and hire spin doctors. The game is to provide as much misinformation as possible, so that their opponents don’t get wise and gang up on them.
Battle of the Silver Price Fixers
Arbitrage is an entertaining film about financial shenanigans written, produced, and directed by Nick Jarecki, son of Dr. Henry Jarecki, one of the most colorful and entertaining characters the metals markets and futures markets have ever produced. I can imagine how Dr. Henry Jarecki might have inspired some of the bravado displayed by Richard Gere’s character.
In his self-published book, An Alchemist’s Road, Henry tells his own matter-of-fact story about silver price manipulation. Henry bought coin dealers’ silver certificates based on each morning’s “Comex opening price,” the price of the first silver trade in the spot month, because this is the price American dealers understood. But he sold the silver represented by the certificates later in the day in London, based on the previous London silver price fixing.
Then something odd happened. Henry noticed the Comex price remained higher than the London price fixing for several weeks. Then he got a call from Alan Rosenberg, a coin dealer. Rosenberg sold silver certificates to an entity called Metals Quality. Rosenberg knew Henry also sold silver certificates from his Federal Coin & Currency operation to Metals Quality. But Rosenberg didn’t realize that Henry was also indirectly buying both Rosenberg’s and Federal’s silver certificates, because Henry was involved with Metals Quality.
Price Fixing Template
Rosenberg figured out how to drive up the Comex price by having his broker bid up the price of just one contract at the opening, the first contract trade of the day. That way, he got 3 or 4 more cents per ounce when he sold his pile of silver certificates to Metals Quality. Everyone else who sold silver certificates that day to Metals Quality also benefited from the higher price, although they didn’t know why.
Each contract is for 10,000 ounces. Rosenberg paid 3 or 4 more cents for the first contract of the day, and then he had to sell the 10,000 ounces at a loss. Rosenberg more than made up for the loss, when he sold his huge stash of silver certificates to Metals Quality at the higher manipulated price. But it bugged Rosenberg that he had to lose money on the first contract.
Why did Rosenberg take the risk of calling Henry? Perhaps you’ll find the reason in “The Psychology of Loss Aversion.” None of this surprised Henry who was a Yale professor and practicing psychiatrist before becoming a metals magnate.
Rosenberg wanted to lower his cost, so he called Henry and proposed to tell Henry on the days that he was manipulating the price. Then he and Henry could split the loss from manipulating the price of the first contract to trade. They would both profit by selling their silver certificates to Metals Quality only on the days that Rosenberg manipulated prices higher.
Henry Fights Back
Henry’s cousin’s cousin, Paul Guterman, worked at Bache and advised Henry to get his own broker to sell a contract at a low price at the Comex open. Henry found floor broker Gunther Garbe, to counter what Rosenberg’s floor broker, Lowell Mintz, was doing. Over the next few days, Garbe sold a contract at a very low price, and Henry bought the coin dealers’ silver at a cheaper price then where he sold it in London.
Then Lowell and Garbe realized their game was a shoving match and agreed that they’d alternate days so that Lowell would buy very high one day, and the next day Lowell would sell very low. It wasn’t long before everyone realized that it wasn’t worth anybody’s time or trouble to continue playing the game.
“Efficient Markets”
Somewhere there is an economist chortling as he rocks back and forth in his chair thinking: See, Janet, I told you we don’t need regulators, the market self-corrects!
It’s true that if Henry had waited for regulators to act, he’d be poorer for it, and he might still be waiting. That only demonstrates that regulators were as ineffective in the 1960’s as (for the most part) they are today. But anyone else who wasn’t in on the game would have to take their chances. They might be paid the artificially high price or the artificially low price. But they had no way of knowing. They weren’t in a position to get a phone call from Rosenberg—Henry was lucky to get the call—or to have their own floor broker.
Effective regulation involves constant investigation. You have to find manipulation and prosecute it. Criminal charges and jail time are powerful deterrents. Today’s bloated and ineffective regulators eschew criminal charges. Regulators are a source of market inefficiency, when they only act as overpaid overhead.
The unfortunate reality is that in the global financial markets, you will usually have to find and slay your own dragons. Find other dragon slayers to help you, if you can. Self-defense is reasonable, when gangs collude against you. In the securitization and credit derivatives markets, people conspired across firms to fix prices. That was worthy of RICO charges, since sometimes they earned money from the same pot. Yet we have yet to see meaningful prosecution.
Gold Manipulation
Structured finance makes it easy to disguise market manipulation, because it’s opaque. Investors can be exposed through surprising terms in structured notes, asymmetric risk language in credit derivatives contracts, futures manipulation, options market manipulation, manipulation of trades against which gold was posted as collateral, and/or due to the basis risk of certain exchange traded funds (ETFs), among other things.
If a “gold” ETF doesn’t allocate gold to investors, doesn’t guarantee it receives “good delivery,” doesn’t purchase insurance on the gold, and allows the “gold” to be leased to short sellers (and others), the ETF poses basis risk versus other ETFs that are managed more prudently.
In March 2010, I wrote a tongue-in-cheek commentary: “How to Corner the Gold Market.” One issue I didn’t raise is Central Bank gold price manipulation. I also didn’t explain why many reasonable investors (including me) have diversified some of their investments into gold in spite of all of this. I’ll have more to say on that later this summer.
http://www.tavakolistructuredfinance.com/2013/08/structured-finance-gold-silver-price-manipulation/
Now that Gold's Bull is Charging, Where is the Easy Money?
Aug. 16, 2013
The Tsi Trader
This evening I was musing over a question posed by a reader about whether this or that mining stock looked to offer the biggest bang in the near term, as it appears the gold bull and its related mining stocks have declared war on being repressed another single day.
I decided to write a little computer program to help me get to some answers and this post will share with you today's assessment of 105 mining related issues in modest detail.
It didn't take me long to figure out which metric to use for my query. The path of least resistance, in the short run anyway, is for miners to achieve the price level of this past March 22nd. This was a high point followed by a huge gap lower and price should have no problem retracing that level as the bull charges ahead.
Cont...
http://thetsitrader.blogspot.com/2013/08/now-that-golds-bull-is-charging-where.html
CFTC subpoenas metals warehouse company
* The Commodity Futures Trading Commission has subpoenaed ( http://tinyurl.com/mpbl2qt ) an unnamed metals warehousing firm for all of its documents and communications related to the London Metal Exchange since January 2010, Reuters reports.
* The subpoena focuses on "anything that relates to moving metal from one warehouse to another within the same company... and procedures for loading out."
* The CFTC last month ordered the warehouse to preserve emails, documents and instant messages from the past three years. In July, the NYT reported ( http://tinyurl.com/kq2bdu2 ) that warehouses which received such an order included Goldman Sachs (GS), Glencore (GLNCY.PK) and Noble Group (NOBGF.PK)
* Meanwhile, Department of Justice officials has visited a warehousing company different to the one referred to above and asked about its operations.
* Warehouses have been under increasing scrutiny over allegations that their activities have artificially boosted the price of metals, particularly aluminum.
http://seekingalpha.com/currents/commodities
(special thanks to basserdan)
The Bi-polar World of Rich Bankers. Wall Street “Take-Off” 2012 – 2013
By Prof. James Petras
Global Research, August 12, 2013
On July 16, 2013, Goldman Sachs, the fifth largest US bank by assets announced its second quarter profits doubled the previous year to $1.93 billion. J. P. Morgan, the largest bank made $6.1 billion in the second quarter up 32% over the year before and expects to make $25 billion in profits in 2013. Wells Fargo, the fourth largest bank, reaped $5.27 billion, up 20%. Citigroup’s profits topped $4.18 billion, up 42% over the previous year.
The ruling elite, the financial CEOs pay is soaring: John Stumpf of Wells Fargo received $19.3 million in 2012; Jamie Dimon of J. P. Morgan Chase pocketed $18.7 million and Lloyd Blankfein of Goldman Sachs took $13.3 million.
The Bush-Obama Wall Street bailout has resulted in the deepening financialization of the US economy: Finance has displaced the technology industry as the profitable sector of the US economy. While the US economy stagnates and the European Union wallows in recession and with over 50 million unemployed, US financial corporations in the Standard and Poor 500 index earned aggregate profits of $49 billion in the second quarter of 2013, while the tech sector reported $41.5 billion. For 2013, Wall Street is projected to earn $198.5 billion in profits, while tech companies are expected to earn $183.1 billion. Within the financial sector, the most ‘speculative sectors’, i.e. investment banks and brokerage houses, are dominant and dynamic growing 40% in 2013. Over 20% of the S and P 500 corporate profits are concentrated in the financial sector.
The financial crash of 2008-2009 and the Obama bailout, reinforced the dominance of Wall Street over the US economy. The result is that the parasitic financial sector is extracting enormous rents and profits from the economy and depriving the productive industries of capital and earnings. The recovery and boom of corporate profits since the crises turns out to be concentrated in the same financial sector which provoked the crash a few years back.
The Crises of Labor Deepens – 2013
The new speculative bubble of 2012 – 2013 is a product of the central banks’ (the Federal Reserve in the United States) low (virtually zero) interest policies, which allow Wall Street to borrow cheaply and speculate, activities which puff up stock prices but do not generate employment, and furthermore depress industry and polarize the economy.
The Obama regime’s promotion of financial profits is accompanied by its policies reducing living standards for wage and salaried workers. The White House and Congress have slashed public spending on health, education and social services. They have cut funds for the food stamps program (food subsidies for poor families), day care centers, unemployment benefits, social security inflation adjustments, Medicare and Medicare programs. As a result the gap between the top 10% and the bottom 90% has widened. Wages and salaries have declined in relative and absolute terms, as employees take advantage of high unemployment (7.8% official) underemployment (15%) and precarious employment.
In 2013 capitalist profits , especially in the financial capital, are booming while the crises of labor persists, deepens and provokes political alienation. Outside of North America , especially in the European periphery, mass unemployment and declining living standards has led to mass protests and repeated general strikes.
In the first half of 2013 Greek workers organized four general strikes protesting the massive firing of public sector workers; in Portugal two general strikes have led to calls for the resignation of the Prime Minister and new elections. In Spain corruption at the highest level, fiscal austerity leading to 25% unemployment and repression have led to intensifying street fighting and calls for the regime to resign.
The bi-polar world of rich bankers in the North racking up record profits and workers everywhere receiving a shrinking share of national income spells out the class basis of “recovery” and “depression”, prosperity for the few and immiseration for the many. By the end of 2013, the imbalances between finance and production foretell a new cycle of boom and bust. Emblematic of the demise of the “productive economy” is the city of Detroit ’s declaration of bankruptcy: with 79,000 vacant homes, stores and factories the city resembles Baghdad after the US invasion – nothing works. The Wall Street-devastated city, once the cradle of both the auto industry and the organized industrial workers’ leap into the middle-class, now has debts totaling $20 billion.
The big three auto companies have relocated overseas and to non-union states while the billionaire bankers “restructure” the economy, break unions, lower wages, renege on pensions and rule by administrative decree.
http://www.globalresearch.ca/the-bi-polar-world-of-rich-bankers-wall-street-take-off-2012-2013/5345685
This Could Shake Muni Bonds to the Core
By SHAH GILANI, Capital Wave Strategist
Money Morning August 2, 2013
Editor's Note: Detroit is more than a sideshow. What's at stake here is bigger than most investors realize. It could take a Supreme Court decision to determine the viability of many municipal bonds. Regardless of whether you are a muni bond investor or not, what happens in Detroit will affect you. Shah Gilani has the whole story.
Detroit went bankrupt, but so what?
Its own decades-long gross political mismanagement, corruption and incompetence pushed the city over the cliff into bankruptcy.
Why should we care?
It could change the way investors look at muni bonds. And not for the better.
The largest Chapter 9 filing in U.S. history will reverberate well beyond this once- bustling city and its creditors.
What's most threatening to muni bond investors, and in fact all investors, is whether the city's general obligation bonds are secured or unsecured issues.
General obligation bonds, backed by a city's ability to levy taxes to pay interest and principal, are thought to be the safest of all munis.
Detroit is putting this to the test.
Without the ability to levy taxes on account of a dwindling population, and raise revenues sufficient to backstop its general obligation bonds, Detroit raises the crucial question that could affect muni bond investors around the country:
Are general obligation bonds unsecured and what are investors' rights?
The Supreme Court may be hearing this issue. And muni bond investing may be shaken to its core.
Detroit's Chapter 9 bankruptcy filing is what could hammer muni bond markets, because it gives the city the ability to possibly purge what everybody thought were its secured muni bond obligations.
And this could set a terrible precedent for investors everywhere as cities, counties and municipalities in financial straits around the country consider this form of bankruptcy.
Detroit's Sneaky Move
Everyone is mad at Kevyn Orr, the "emergency manager" of Detroit appointed earlier this year under a revamped state law designed to "alleviate the financial problems of Michigan's municipalities and school districts."
Creditors claim they were negotiating in good faith with the emergency manager instead of suing and pursuing their collateral rights when Orr blindsided them with the bankruptcy filing.
Detroit's ability to file for bankruptcy under Chapter 9 has been challenged in Michigan state court by the city's pension funds, bondholders, and other creditors who claim that in spite of the city being more than $18 billion in debt, it is not insolvent.
Last Wednesday U.S. Bankruptcy Judge Steven Rhodes, the federal judge overseeing Detroit's Chapter 9 filing from his Chicago bench, halted all lawsuits related to the city's bankruptcy filing, handing Detroit an early victory and clearing the way for it to proceed with its bankruptcy filing.
Detroit's pension plans alone have unfunded claims amounting to $9.2 billion, which breaks down into $5.7 billion of unfunded retiree health insurance obligations and $3.5 billion in unfunded pension payment obligations. While the pension fund plan managers speak for the plans, the city's 23,500 retirees have no formal legal representation.
Is Filing Chapter 9 A New Fad?
The Chapter 9 filing differs from a Chapter 11 bankruptcy filing for a corporation, which allows outside parties to make counter-proposals, or from a Chapter 7 filing that would require a liquidation of the city's assets.
Also, the Chapter 9 filing makes the city less vulnerable to any other parties controlling its much- needed restructuring.
"In a Chapter 9, which means the city holds more cards than they do in a private sector filing, the judge can't impose a plan on the city and no one else decides what they can do," said Michael Sweet, a noted authority on financial restructuring and bankruptcy.
What actually happens under Chapter 9 is:
* The city gets an automatic stay against commencing or continuing collection efforts and foreclosures by creditors, but it doesn't prohibit payment of certain obligations if the city can and wants to make payments.
* It's business as usual for Detroit. Section 904 of the Code prohibits the bankruptcy court from interfering in the political or government powers of the city or from use and enjoyment of income- producing properties.
* Section 109(c) of the Code imposes eligibility on entities filing for relief under Chapter 9. Court hearings on a filing entity's eligibility are at the heart of the actions brought against the city's Chapter 9 filing in state court. There is no easy or quick answer to the eligibility question.
California's San Bernardino County, which filed for Chapter 9 protection, took almost a year to be declared eligible. The eligibility status of Stockton, California is still being argued in court more than 16 months after it filed for Chapter 9 protection from its creditors.
Ultimately, the eligibility issue could make its way to the Supreme Court, which may have to decide on Chapter 9 issues if more cities, counties, or municipalities threaten to restructure under court protection.
That's why the bankruptcy of Detroit will change government financing methods, investor appetite for government bonds, and how other American cities, municipalities and counties face the music from the Great Recession and their borrowing binges.
For more on what Detroit's bankruptcy means for muni bond investments, read here.
http://moneymorning.com/2013/08/02/this-could-shake-muni-bonds-to-the-core/
Swaps Probe Finds Banks Manipulated Rate at Expense of Retirees
By Matthew Leising - Aug 2, 2013 2:00 AM ET
Bloomberg
U.S. investigators have uncovered evidence that banks reaped millions of dollars in trading profits at the expense of companies and pension funds by manipulating a benchmark for interest-rate derivatives.
Recorded telephone calls and e-mails reviewed by the Commodity Futures Trading Commission show that traders at Wall Street banks instructed ICAP Plc brokers in Jersey City, New Jersey, to buy or sell as many interest-rate swaps as necessary to move the benchmark rate, known as ISDAfix, to a predetermined level, according to a person with knowledge of the matter.
By rigging the measure, the banks stood to profit on separate derivatives trades they had with clients who were seeking to hedge against moves in interest rates. Banks sought to change the value of the swaps because the ISDAfix rate sets prices for the other derivatives, which are used by firms from the California Public Employees’ Retirement System to Pacific Investment Management Co., said the person, who asked not to be identified because the details aren’t public.
That may run afoul of the 2010 Dodd-Frank Act, which bars traders from intentionally interfering with the “orderly execution” of transactions that determine settlement prices.
The phone calls and e-mails emerging since Bloomberg News first reported in April on the rigging of ISDAfix add to growing evidence that banks have gained financially by distorting key financial gauges in world markets on everything from interest rates to currencies to commodities.
Million E-Mails
The revelations show the manipulation of the London interbank offered rate, or Libor, a benchmark for $300 trillion of securities, may be the tip of the iceberg. The Libor probe has so far led to fines of about $2.5 billion against Barclays Plc (BARC), UBS AG (UBSN) and Royal Bank of Scotland Group Plc. (RBS)
While the indexes under scrutiny are little known to the public, their influence extends to trillions of dollars in securities and derivatives. Britain’s markets regulator is looking into the currency market, where $4.7 trillion is exchanged each day, after Bloomberg News reported in June that traders have manipulated key rates for more than a decade.
As part of the ISDAfix investigation, the CFTC has interviewed more than a dozen traders and brokers since May at Barclays and ICAP, both based in London, and New York-based Citigroup Inc., and plans to talk with people at 13 other banks as it sifts through 1 million e-mails, the person said. Barclays gave the CFTC recorded phone calls, the person said.
‘Bigger Story’
Companies, pension funds and investment firms from Calpers, the largest U.S. pension, to Newport Beach, California-based Pimco, manager of the world’s biggest mutual fund, use the kind of derivatives at the heart of the ISDAfix probe to hedge against losses or to speculate on interest-rate fluctuations.
“ISDAfix, more obscure than Libor, has the potential to affect more people’s lives” because it’s used by pension funds to hedge portfolio risks and by most companies or users of fixed-income derivatives, said Jack Chen, a financial consultant in New York who has written about the swaps benchmark and Libor for SFC Associates, a financial consulting firm specializing in litigation matters.
“In three years, ISDAfix will be the bigger story and could be potentially bigger than Libor in terms of damages,” he said.
Representatives from Calpers and Pimco didn’t immediately respond to requests for comment.
Skyscrapers to Annuities
ISDAfix is used to value derivatives trades known as swaptions, which are options on rate swaps. The contracts give the holder the right to swap a fixed- for a floating-rate obligation at some future point at a predetermined level. The amount of derivatives underlying swaptions contracts outstanding as of July 26 totaled $29.5 trillion, according to the Depository Trust & Clearing Corp.
ISDAfix rates also help determine everything from borrowing costs on bonds that finance skyscrapers to interest on annuities. The benchmark, set in five currencies, is used to price euro-denominated corporate bonds and $550 billion of securities tied to commercial real estate. Fluctuations help determine the performance of structured notes bought by wealthy individuals.
Kerrie Cohen, a spokeswoman for Barclays, declined to comment, as did Scott Helfman of Citigroup and Steve Adamske, a spokesman for the CFTC in Washington.
“ICAP is cooperating with the CFTC’s wider inquiry into this area, and due to its pending nature we will not be commenting further,” Guy Taylor, a spokesman, said in a telephone interview.
‘Banging the Close’
CFTC investigators are piecing together evidence that shows swaption traders at banks worked with rate-swap traders at their own firms to manipulate ISDAfix, the person said. The swaption traders told their rate-swap colleagues the level at which they needed ISDAfix to be set that day in order to bolster the value of their derivatives positions before these were settled the next day, the person said.
The rate-swap trader would then tell a broker at ICAP, the biggest arranger of the contracts between banks, to execute as many trades in interest-rate swaps as necessary to move ISDAfix to the desired level. This would be done just before 11 a.m. in New York, the time when current trades are used to create reference points that help determine the final ISDAfix rates, the person said.
Treasure Island
Buying or selling large volumes to move prices just before the end of a trading day or benchmark fixing is known as banging the close. Such trading may violate Dodd-Frank, the regulatory overhaul passed by Congress after the worst financial crisis since the Great Depression. The law defines the activity as demonstrating “intentional or reckless disregard for the orderly execution of transactions during the closing period.”
In manipulating ISDAfix, ICAP brokers profited from the commissions they received from the interest-rate swap trades banks ordered to influence the benchmark, the person said.
Banks were willing to endure trading costs with the brokers that may have reached hundreds of thousands of dollars because they stood to earn millions on swaptions by manipulating ISDAfix by as little as a quarter of a basis point, or 0.0025 percentage point, the person said.
The CFTC investigation is centered on ICAP’s (IAP) U.S. interest-rate swap desk, nicknamed Treasure Island because brokers there were paid as much as $7 million a year at the market’s peak, two people with knowledge of the matter said in April.
‘Strict Rules’
ICAP manages an electronic screen known as 19901 on which rate-swap prices are displayed throughout the day to about 6,000 corporate treasurers and money managers so they can value positions. The trades displayed on the screen are used to create the reference points for ISDAfix rates, according to ISDA’s website. ICAP then sends the reference point to banks, which either accept it as their contribution to the benchmark or submit a different value.
The team of about 20 Treasure Island brokers made $100 million to $120 million annually for ICAP around 2008 and 2009, the people said in April. Rates swaps with a notional value of $370 trillion were outstanding at the end of 2012, according to the Bank for International Settlements.
“We have very strict rules for our staff who work on the dollar-swap desk,” ICAP Chief Executive Officer Michael Spencer said on a May 14 conference call with reporters. “So far, nothing that we have discovered in our internal investigations gives me sleepless nights, and nothing that I’ve heard externally suggests ISDAfix has been tampered with.”
Libor Rigging
Investigators will need to produce e-mails that clearly show manipulative intent by traders, as they did in the Libor probe, Chen said. Otherwise, the banks may be able to defend the actions as typical trading activities, he said.
Regulators from New York to Singapore have begun looking into the possible rigging of other market benchmarks.
NYSE Euronext, owner of the New York Stock Exchange, said last month it will replace the British Bankers’ Association in administering Libor rates and vowed to restore confidence to the measure amid the rigging scandal. Libor has been overseen by the U.K. Financial Conduct Authority since April as part of an overhaul.
The European Commission said in May it was investigating Royal Dutch Shell Plc, BP Plc and Statoil ASA, three of Europe’s biggest oil explorers, over potential manipulation of Brent Crude, which helps set prices in the $3.4 trillion-a-year global oil market. Neste Oil Oyj, Finland’s only refiner, was asked to provide information regarding the probe.
Electronic Screen
The International Swaps and Derivatives Association created ISDAfix in 1998 along with the predecessors of Thomson Reuters Corp. and ICAP.
“ISDA developed ISDAfix to facilitate the determination of exercise values for cash-settled swap options,” the New York-based lobbying and trade group says on its website.
The rates are distributed by Thomson Reuters, Telekurs and Bloomberg LP, the parent of Bloomberg News, according to ISDA’s website. Bloomberg competes with ICAP in some businesses, including foreign-exchange and swaps trading.
The contributors to ISDAfix being investigated by the CFTC are Bank of America Corp. (BAC), Barclays, BNP Paribas SA, Citigroup, Credit Suisse Group AG (CSGN), Deutsche Bank AG (DBK), Goldman Sachs Group Inc., HSBC Holdings Plc (HSBA), JPMorgan Chase & Co. (JPM), Mizuho Financial Group Inc. (8411), Morgan Stanley (MS), Nomura Holdings Inc. (8604), Royal Bank of Scotland, UBS and Wells Fargo & Co. (WFC)
Representatives of the banks declined to comment.
To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.
http://www.bloomberg.com/news/2013-08-02/swaps-probe-finds-banks-manipulated-rate-at-expense-of-retirees.html
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.
Swaps Probe Finds Banks Manipulated Rate at Expense of Retirees
By Matthew Leising - Aug 2, 2013 2:00 AM ET
Bloomberg
U.S. investigators have uncovered evidence that banks reaped millions of dollars in trading profits at the expense of companies and pension funds by manipulating a benchmark for interest-rate derivatives.
Recorded telephone calls and e-mails reviewed by the Commodity Futures Trading Commission show that traders at Wall Street banks instructed ICAP Plc brokers in Jersey City, New Jersey, to buy or sell as many interest-rate swaps as necessary to move the benchmark rate, known as ISDAfix, to a predetermined level, according to a person with knowledge of the matter.
By rigging the measure, the banks stood to profit on separate derivatives trades they had with clients who were seeking to hedge against moves in interest rates. Banks sought to change the value of the swaps because the ISDAfix rate sets prices for the other derivatives, which are used by firms from the California Public Employees’ Retirement System to Pacific Investment Management Co., said the person, who asked not to be identified because the details aren’t public.
That may run afoul of the 2010 Dodd-Frank Act, which bars traders from intentionally interfering with the “orderly execution” of transactions that determine settlement prices.
The phone calls and e-mails emerging since Bloomberg News first reported in April on the rigging of ISDAfix add to growing evidence that banks have gained financially by distorting key financial gauges in world markets on everything from interest rates to currencies to commodities.
Million E-Mails
The revelations show the manipulation of the London interbank offered rate, or Libor, a benchmark for $300 trillion of securities, may be the tip of the iceberg. The Libor probe has so far led to fines of about $2.5 billion against Barclays Plc (BARC), UBS AG (UBSN) and Royal Bank of Scotland Group Plc. (RBS)
While the indexes under scrutiny are little known to the public, their influence extends to trillions of dollars in securities and derivatives. Britain’s markets regulator is looking into the currency market, where $4.7 trillion is exchanged each day, after Bloomberg News reported in June that traders have manipulated key rates for more than a decade.
As part of the ISDAfix investigation, the CFTC has interviewed more than a dozen traders and brokers since May at Barclays and ICAP, both based in London, and New York-based Citigroup Inc., and plans to talk with people at 13 other banks as it sifts through 1 million e-mails, the person said. Barclays gave the CFTC recorded phone calls, the person said.
‘Bigger Story’
Companies, pension funds and investment firms from Calpers, the largest U.S. pension, to Newport Beach, California-based Pimco, manager of the world’s biggest mutual fund, use the kind of derivatives at the heart of the ISDAfix probe to hedge against losses or to speculate on interest-rate fluctuations.
“ISDAfix, more obscure than Libor, has the potential to affect more people’s lives” because it’s used by pension funds to hedge portfolio risks and by most companies or users of fixed-income derivatives, said Jack Chen, a financial consultant in New York who has written about the swaps benchmark and Libor for SFC Associates, a financial consulting firm specializing in litigation matters.
“In three years, ISDAfix will be the bigger story and could be potentially bigger than Libor in terms of damages,” he said.
Representatives from Calpers and Pimco didn’t immediately respond to requests for comment.
Skyscrapers to Annuities
ISDAfix is used to value derivatives trades known as swaptions, which are options on rate swaps. The contracts give the holder the right to swap a fixed- for a floating-rate obligation at some future point at a predetermined level. The amount of derivatives underlying swaptions contracts outstanding as of July 26 totaled $29.5 trillion, according to the Depository Trust & Clearing Corp.
ISDAfix rates also help determine everything from borrowing costs on bonds that finance skyscrapers to interest on annuities. The benchmark, set in five currencies, is used to price euro-denominated corporate bonds and $550 billion of securities tied to commercial real estate. Fluctuations help determine the performance of structured notes bought by wealthy individuals.
Kerrie Cohen, a spokeswoman for Barclays, declined to comment, as did Scott Helfman of Citigroup and Steve Adamske, a spokesman for the CFTC in Washington.
“ICAP is cooperating with the CFTC’s wider inquiry into this area, and due to its pending nature we will not be commenting further,” Guy Taylor, a spokesman, said in a telephone interview.
‘Banging the Close’
CFTC investigators are piecing together evidence that shows swaption traders at banks worked with rate-swap traders at their own firms to manipulate ISDAfix, the person said. The swaption traders told their rate-swap colleagues the level at which they needed ISDAfix to be set that day in order to bolster the value of their derivatives positions before these were settled the next day, the person said.
The rate-swap trader would then tell a broker at ICAP, the biggest arranger of the contracts between banks, to execute as many trades in interest-rate swaps as necessary to move ISDAfix to the desired level. This would be done just before 11 a.m. in New York, the time when current trades are used to create reference points that help determine the final ISDAfix rates, the person said.
Treasure Island
Buying or selling large volumes to move prices just before the end of a trading day or benchmark fixing is known as banging the close. Such trading may violate Dodd-Frank, the regulatory overhaul passed by Congress after the worst financial crisis since the Great Depression. The law defines the activity as demonstrating “intentional or reckless disregard for the orderly execution of transactions during the closing period.”
In manipulating ISDAfix, ICAP brokers profited from the commissions they received from the interest-rate swap trades banks ordered to influence the benchmark, the person said.
Banks were willing to endure trading costs with the brokers that may have reached hundreds of thousands of dollars because they stood to earn millions on swaptions by manipulating ISDAfix by as little as a quarter of a basis point, or 0.0025 percentage point, the person said.
The CFTC investigation is centered on ICAP’s (IAP) U.S. interest-rate swap desk, nicknamed Treasure Island because brokers there were paid as much as $7 million a year at the market’s peak, two people with knowledge of the matter said in April.
‘Strict Rules’
ICAP manages an electronic screen known as 19901 on which rate-swap prices are displayed throughout the day to about 6,000 corporate treasurers and money managers so they can value positions. The trades displayed on the screen are used to create the reference points for ISDAfix rates, according to ISDA’s website. ICAP then sends the reference point to banks, which either accept it as their contribution to the benchmark or submit a different value.
The team of about 20 Treasure Island brokers made $100 million to $120 million annually for ICAP around 2008 and 2009, the people said in April. Rates swaps with a notional value of $370 trillion were outstanding at the end of 2012, according to the Bank for International Settlements.
“We have very strict rules for our staff who work on the dollar-swap desk,” ICAP Chief Executive Officer Michael Spencer said on a May 14 conference call with reporters. “So far, nothing that we have discovered in our internal investigations gives me sleepless nights, and nothing that I’ve heard externally suggests ISDAfix has been tampered with.”
Libor Rigging
Investigators will need to produce e-mails that clearly show manipulative intent by traders, as they did in the Libor probe, Chen said. Otherwise, the banks may be able to defend the actions as typical trading activities, he said.
Regulators from New York to Singapore have begun looking into the possible rigging of other market benchmarks.
NYSE Euronext, owner of the New York Stock Exchange, said last month it will replace the British Bankers’ Association in administering Libor rates and vowed to restore confidence to the measure amid the rigging scandal. Libor has been overseen by the U.K. Financial Conduct Authority since April as part of an overhaul.
The European Commission said in May it was investigating Royal Dutch Shell Plc, BP Plc and Statoil ASA, three of Europe’s biggest oil explorers, over potential manipulation of Brent Crude, which helps set prices in the $3.4 trillion-a-year global oil market. Neste Oil Oyj, Finland’s only refiner, was asked to provide information regarding the probe.
Electronic Screen
The International Swaps and Derivatives Association created ISDAfix in 1998 along with the predecessors of Thomson Reuters Corp. and ICAP.
“ISDA developed ISDAfix to facilitate the determination of exercise values for cash-settled swap options,” the New York-based lobbying and trade group says on its website.
The rates are distributed by Thomson Reuters, Telekurs and Bloomberg LP, the parent of Bloomberg News, according to ISDA’s website. Bloomberg competes with ICAP in some businesses, including foreign-exchange and swaps trading.
The contributors to ISDAfix being investigated by the CFTC are Bank of America Corp. (BAC), Barclays, BNP Paribas SA, Citigroup, Credit Suisse Group AG (CSGN), Deutsche Bank AG (DBK), Goldman Sachs Group Inc., HSBC Holdings Plc (HSBA), JPMorgan Chase & Co. (JPM), Mizuho Financial Group Inc. (8411), Morgan Stanley (MS), Nomura Holdings Inc. (8604), Royal Bank of Scotland, UBS and Wells Fargo & Co. (WFC)
Representatives of the banks declined to comment.
To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.
http://www.bloomberg.com/news/2013-08-02/swaps-probe-finds-banks-manipulated-rate-at-expense-of-retirees.html
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.
Why Doesn't Jack Lew Support the New Glass-Steagall Act?
By GREG MADISON, Contributing Writer,
Money Morning July 30, 2013
You'd think that in the wake of the Great Collapse of 2008, reviving the Glass-Steagall Act would be a no-brainer.
As it happens, there are quite a few powerful members of government who oppose it, including Treasury Secretary Jack Lew, who seems to be pushing Dodd-Frank and the Volcker Rule a little too hard as the only regulation that's needed to keep the banks from making bad bets in toxic derivatives again.
But a little history lesson will show why his plan won't work.
In the wake of the Great Collapse of 2008, it was clear that we needed legislation that tightly regulates the big banks and their investments while encouraging economic growth.
Until the late 1990s, the Glass-Steagall Act of 1933 worked well in maintaining financial stability for decades by placing a wall between commercial and investment banking.
But when Glass-Steagall was repealed in 1999, it freed the big banks to start taking bigger and bigger risks with more and more federally-insured depositor money.
The banks' growth accelerated. When those bets went bad starting in 2007, and in the absence of a wall, the resulting losses spread throughout the U.S. and global financial systems.
After the Great Collapse, Congress enacted Dodd-Frank to forestall future financial catastrophes and eliminate the regulatory creed of bailing out Too-Big-to-Fail banks.
We've had Dodd-Frank on the books now, in one way or another, for two years. Over this period, banks have once again begun to ramp up their risky behavior and have grown even larger than they were when taxpayers bailed them out five years ago.
All this has happened despite Dodd-Frank and the Volcker Rule, which says, "Banks ought not to take risks with depositors' money."
Fortunately, some in Congress realize more needs to be done to protect taxpayers from the banks. Sens. Elizabeth Warren, D-MA and John McCain, R-AZ, recently introduced the 21st Century Glass-Steagall Act. The new legislation doesn't depend on anything like Scouts' Honor to make sure banks don't make big bad bets that they can't cover.
This proposed legislation would rebuild the wall between commercial and investment banking that existed while the original legislation was in place, and should in theory bring the same levels of financial stability that we enjoyed more or less from the end of World War II through the 1990s.
Sounds great, right? So what's the problem? In an administration as "progressive" as the Obama White House, who could possibly be against regulations like this?
Lew's Past Sheds Light on Why He's Cool Toward Glass-Steagall Act 2013
That brings us back to Jack Lew, who somehow has found the idea of a Glass-Steagall 2013 objectionable.
Lew has a longhistory in government finance. He worked in budget management for the city of Boston, and for the Clinton administration. He headed up the Office of Management and Budget under President Obama before moving up to Treasury.
But in between his government stints, like many who serve in federal budget and finance positions, Lew left government for a few years to make some money. In the middle of the last decade, he worked for Citigroup's Alternative Investment unit, which was its proprietary trading unit, dealing with hedge funds that actually bet on the collapse of the housing market.
At Citi, Lew invested large sums in funds based in the Cayman Islands - specifically in companies listed as residing in Ugland House, an office building in the capital city, George Town. Ugland House is the registered office for 18,857 business entities. President Obama himself referred to Ugland House as "either the biggest building in the world or the biggest tax scam in the world."
But, when pressed on the question of Lew's Ugland House history, President Obama said he wasn't "concerned" with the past financial dealings of his Treasury Secretary nominee.
At the same time, Lew has danced around the edges of the proposed new Glass-Steagall 2013 legislation, saying that Dodd-Frank, with all of its loopholes and problems, is sufficient for tackling the Too Big to Fail problem.
What's more, he's said that the "problems of the financial industry preceded deregulation," and that repealing the original Glass-Steagall "wasn't the proximate cause" of the Great Collapse.
We Should All Know Where Our Bread Is Buttered
In other words, Lew is claiming that the deregulated environment of the first decade of this century wasn't when the Great Collapse was born. In light of the fact that Lew himself was turning a profit in the deregulated market, this shouldn't be a surprise.
That he was actively betting against the housing market, just before it imploded, should be a red flag, and that this was all done at one of the biggest of the Too Big To Fail banks - a recipient of $45 billion in TARP bailout funds - should be taken as a warning that Jack Lew's relationship with regulation needs to be closely and publicly examined.
The fact is that the Jack Lews, the Tim Geithners, the Penny Pritzkers... all of them are industry insiders, all with links to the very institutions they purport to regulate and oversee. This "progressive" administration is really setting us up for more of the same, it would seem.
The Foxes Really Are Guarding the Henhouse
What Secretary Lew presents us with is a "fox guarding the henhouse" scenario, in which someone with a vested interest in seeing banks continue as they are and have been is also in a position to act as a regulator of those banks. How this obvious conflict of interest has been brushed aside is baffling.
We would do well to be wary of the support that Lew is throwing behind Dodd-Frank and its Volcker Rule. Lew is pushing hard for Dodd-Frank to be fully codified into law by the July deadline, and has said that the Volcker Rule will be sufficient to keep a wall between investment and commercial banking, as well as preventing Too Big to Fail banks from failing at taxpayer expense.
Lew has darkly claimed that there will be "other options" if the parties concerned with writing the regulations for Dodd-Frank are unable to meet the deadline. He has made statements saying that further delay raises the threat of bailouts. He has come just short of saying the sky itself will fall... unless Dodd-Frank is set in stone.
Building a wall between investment and commercial banking is absolutely necessary - vital, even -- to restoring this country's financial health. But building a brick wall between the President, his Cabinet, and the special interests of Wall Street - our financial undoing - is a priority no one in the Obama administration seems to be paying attention to.
For more on Glass-Steagall 2013, and everything at stake in this debate, click here.
http://moneymorning.com/2013/07/30/why-doesnt-jack-lew-support-the-new-glass-steagall-act/
Riverside Resources and Alliance Partner Antofagasta Commence Drilling at the Lennac and Flute Projects in British Columbia
VANCOUVER, BRITISH COLUMBIA--(Marketwired - July 30, 2013) - Riverside Resources Inc. ("Riverside" or the "Company") (TSX VENTURE:RRI)(RVSDF)(R99.F) and its partner, Antofagasta Minerals S.A., are pleased to announce that Reverse-Circulation (RC) drilling and exploration work are now underway at the Flute and Lennac Designated Projects located east of Smithers in central British Columbia (BC). The 2013 exploration work program will include extensive RC drill testing, Ah-horizon soil sampling, geological mapping and rock sampling. The program has been planned to both expand anomalous zones identified over the 2012 season and to test new targets within the Flute and Lennac properties with an aggressive RC top-of-bedrock drill campaign.
The RC drill plan includes initially drilling 56 planned holes on the Lennac (9 holes) and Flute (47 holes) properties and 20 contingent drill-holes for an initial follow-up on encouraging results from the top-of-bedrock sampling. The RC drill program follows an Ah-horizon soil sampling program which was initiated in mid-May this year to evaluate prospective areas with limited outcrop. Approximately 400 Ah-horizon soil samples have been sent for assay with several new anomalous zones already identified for priority follow-up.
In addition to the Flute and Lennac properties, Riverside continues to stake strategic exploration ground while also evaluating third party acquisition opportunities throughout the alliance area of interest.
"Riverside looks forward to further exploration results as we continue to delineate strong copper targets at the existing Designated Projects, while working hard to deliver further discovery prospects for the alliance as we continue moving forward."
-John-Mark Staude, President & CEO of Riverside Resources Inc.
About Riverside Resources Inc.:
Riverside is a well-funded prospect generation team of focused, proactive gold discoverers with the breadth of knowledge to dig much deeper. The Company currently has approximately $6,000,000 in the treasury and 37,000,000 shares outstanding. The Company's model of growth through partnerships and exploration looks to use the prospect generation business approach to own resources, while partners share in de-risking projects on route to discovery.
Riverside has additional properties available for option with more information available on the Company's website at www.rivres.com.
Qualified Person:
The scientific and technical data contained in this news release pertaining to the Flute and Lennac Projects were prepared under the supervision of Paola Chadwick, P.Geo - BC Exploration Manager, a non-independent qualified person to Riverside, who is responsible for ensuring that the geologic information provided in this news release is accurate and acts as a "Qualified Person" under National Instrument 43-101 Standards of Disclosure for Mineral Projects.
ON BEHALF OF RIVERSIDE RESOURCES INC.
Dr. John-Mark Staude, President & CEO
Certain statements in this press release may be considered forward-looking information. These statements can be identified by the use of forward-looking terminology (e.g., "expect"," estimates", "intends", "anticipates", "believes", "plans"). Such information involves known and unknown risks -- including the availability of funds, the results of financing and exploration activities, the interpretation of exploration results and other geological data, or unanticipated costs and expenses and other risks identified by Riverside in its public securities filings that may cause actual events to differ materially from current expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release.
Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
Contact:
Riverside Resources Inc.
John-Mark Staude
President & CEO
(778) 327-6675
(778) 327-6671
info@rivres.com
www.rivres.com
Riverside Resources Inc.
Joness Lang
Manager, Corporate Development
(778) 327-6675
(800) RIV-RES1
jlang@rivres.com
www.rivres.com
http://finance.yahoo.com/news/riverside-resources-alliance-partner-antofagasta-130000572.html
Obama to propose 'grand bargain' on corporate tax rate, infrastructure
By Steve Holland
WASHINGTON | Tue Jul 30, 2013 6:11am EDT
(Reuters) - President Barack Obama will propose a "grand bargain for middle-class jobs" on Tuesday that would cut the U.S. corporate tax rate and use billions in revenues generated by a business tax overhaul to fund projects aimed at creating jobs.
His goal, to be outlined in a speech at an Amazon.com Inc facility in Chattanooga, Tennessee, is to break through congressional gridlock by trying to find a formula that satisfies both Republicans and Democrats.
Efforts to reach a bipartisan "grand bargain" on deficit reduction have been at an impasse for months. Senior administration officials say Obama is not giving up on a big deficit-cutting package, but given that no agreement appears on the horizon so far, he is offering a new idea to try to follow through on his 2012 re-election campaign promises to help the middle class.
"As part of his efforts to focus Washington on the middle class, today in Tennessee the president will call on Washington to work on a grand bargain focused on middle-class jobs by pairing reform of the business tax code with a significant investment in middle-class jobs," Obama senior adviser Dan Pfeiffer said.
Obama wants to cut the corporate tax rate of 35 percent down to 28 percent and give manufacturers a preferred rate of 25 percent. He also wants a minimum tax on foreign earnings as a tool against corporate tax evasion and increased use of tax havens.
The new twist is that in exchange for his support for a corporate tax reduction, he wants money generated by the tax overhaul to be used on a mix of proposals such as funding infrastructure projects like repairing roads and bridges, improving education at community colleges, and promoting manufacturing, senior administration officials said.
Obama's proposal would generate a one-time source of revenue, for example, by reforming depreciation or putting a fee on accumulated foreign earnings.
Officials gave no specific figure on how much money would be raised. But Obama in his State of the Union speech in February called for $50 billion for infrastructure spending.
The White House is hopeful that the idea will gain some traction in the U.S. Congress because Republicans want corporate tax reform and Democrats want spending for infrastructure. This offers something for both sides, administration officials said.
Officials said they recognize, however, that the climate is difficult in Congress with Republicans adamantly refusing anything that is seen as increasing spending and Democrats in no mood to cut taxes and get nothing for it.
Obama's speech in Chattanooga is the latest in a series of speeches aimed at making good on his promises to boost the U.S. economy in ways that helps the middle class. And he is looking to breathe new life into his second term, which has so far found successes to be fleeting.
(Reporting by Steve Holland; Editing by Eric Beech)
http://www.reuters.com/article/2013/07/30/us-usa-obama-idUSBRE96T0F820130730?feedType=RSS&feedName=topNews&utm_source=dlvr.it&utm_medium=twitter&dlvrit=992637
Feds tell Web firms to turn over user account passwords
Secret demands mark escalation in Internet surveillance by the federal government through gaining access to user passwords, which are typically stored in encrypted form.
by Declan McCullagh
July 25, 2013 11:26 AM PDT
CNET.com
The U.S. government has demanded that major Internet companies divulge users' stored passwords, according to two industry sources familiar with these orders, which represent an escalation in surveillance techniques that has not previously been disclosed.
If the government is able to determine a person's password, which is typically stored in encrypted form, the credential could be used to log in to an account to peruse confidential correspondence or even impersonate the user. Obtaining it also would aid in deciphering encrypted devices in situations where passwords are reused.
"I've certainly seen them ask for passwords," said one Internet industry source who spoke on condition of anonymity. "We push back."
A second person who has worked at a large Silicon Valley company confirmed that it received legal requests from the federal government for stored passwords. Companies "really heavily scrutinize" these requests, the person said. "There's a lot of 'over my dead body.'"
Some of the government orders demand not only a user's password but also the encryption algorithm and the so-called salt, according to a person familiar with the requests. A salt is a random string of letters or numbers used to make it more difficult to reverse the encryption process and determine the original password. Other orders demand the secret question codes often associated with user accounts.
"This is one of those unanswered legal questions: Is there any circumstance under which they could get password information?"
--Jennifer Granick, Stanford University
A Microsoft spokesperson would not say whether the company has received such requests from the government. But when asked whether Microsoft would divulge passwords, salts, or algorithms, the spokesperson replied: "No, we don't, and we can't see a circumstance in which we would provide it."
Google also declined to disclose whether it had received requests for those types of data. But a spokesperson said the company has "never" turned over a user's encrypted password, and that it has a legal team that frequently pushes back against requests that are fishing expeditions or are otherwise problematic. "We take the privacy and security of our users very seriously," the spokesperson said.
A Yahoo spokeswoman would not say whether the company had received such requests. The spokeswoman said: "If we receive a request from law enforcement for a user's password, we deny such requests on the grounds that they would allow overly broad access to our users' private information. If we are required to provide information, we do so only in the strictest interpretation of what is required by law."
Apple, Facebook, AOL, Verizon, AT&T, Time Warner Cable, and Comcast did not respond to queries about whether they have received requests for users' passwords and how they would respond to them.
Richard Lovejoy, a director of the Opera Software subsidiary that operates FastMail, said he doesn't recall receiving any such requests but that the company still has a relatively small number of users compared with its larger rivals. Because of that, he said, "we don't get a high volume" of U.S. government demands.
The FBI declined to comment.
Some details remain unclear, including when the requests began and whether the government demands are always targeted at individuals or seek entire password database dumps. The Patriot Act has been used to demand entire database dumps of phone call logs, and critics have suggested its use is broader. "The authority of the government is essentially limitless" under that law, Sen. Ron Wyden, an Oregon Democrat who serves on the Senate Intelligence committee, said at a Washington event this week.
Large Internet companies have resisted the government's requests by arguing that "you don't have the right to operate the account as a person," according to a person familiar with the issue. "I don't know what happens when the government goes to smaller providers and demands user passwords," the person said.
An attorney who represents Internet companies said he has not fielded government password requests, but "we've certainly had reset requests -- if you have the device in your possession, than a password reset is the easier way."
Cracking the codes
Even if the National Security Agency or the FBI successfully obtains an encrypted password, salt, and details about the algorithm used, unearthing a user's original password is hardly guaranteed. The odds of success depend in large part on two factors: the type of algorithm and the complexity of the password.
Algorithms, known as hash functions, that are viewed as suitable for scrambling stored passwords are designed to be difficult to reverse. One popular hash function called MD5, for instance, transforms the phrase "National Security Agency" into this string of seemingly random characters: 84bd1c27b26f7be85b2742817bb8d43b. Computer scientists believe that, if a hash function is well-designed, the original phrase cannot be derived from the output.
But modern computers, especially ones equipped with high-performance video cards, can test passwords scrambled with MD5 and other well-known hash algorithms at the rate of billions a second. One system using 25 Radeon-powered GPUs that was demonstrated at a conference last December tested 348 billion hashes per second, meaning it would crack a 14-character Windows XP password in six minutes.
The best practice among Silicon Valley companies is to adopt far slower hash algorithms -- designed to take a large fraction of a second to scramble a password -- that have been intentionally crafted to make it more difficult and expensive for the NSA and other attackers to test every possible combination.
One popular algorithm, used by Twitter and LinkedIn, is called bcrypt. A 2009 paper (PDF) by computer scientist Colin Percival estimated that it would cost a mere $4 to crack, in an average of one year, an 8-character bcrypt password composed only of letters. To do it in an average of one day, the hardware cost would jump to approximately $1,500.
But if a password of the same length included numbers, asterisks, punctuation marks, and other special characters, the cost-per-year leaps to $130,000. Increasing the length to any 10 characters, Percival estimated in 2009, brings the estimated cracking cost to a staggering $1.2 billion.
As computers have become more powerful, the cost of cracking bcrypt passwords has decreased. "I'd say as a rough ballpark, the current cost would be around 1/20th of the numbers I have in my paper," said Percival, who founded a company called Tarsnap Backup, which offers "online backups for the truly paranoid." Percival added that a government agency would likely use ASICs -- application-specific integrated circuits -- for password cracking because it's "the most cost-efficient -- at large scale -- approach."
While developing Tarsnap, Percival devised an algorithm called scrypt, which he estimates can make the "cost of a hardware brute-force attack" against a hashed password as much as 4,000 times greater than bcrypt.
Bcrypt was introduced (PDF) at a 1999 Usenix conference by Niels Provos, currently a distinguished engineer in Google's infrastructure group, and David Mazières, an associate professor of computer science at Stanford University.
With the computers available today, "bcrypt won't pipeline very well in hardware," Mazières said, so it would "still be very expensive to do widespread cracking."
Even if "the NSA is asking for access to hashed bcrypt passwords," Mazières said, "that doesn't necessarily mean they are cracking them." Easier approaches, he said, include an order to extract them from the server or network when the user logs in -- which has been done before -- or installing a keylogger at the client.
Sen. Ron Wyden, who warned this week that "the authority of the government is essentially limitless" under the Patriot Act's business records provision.
Sen. Ron Wyden, who warned this week that "the authority of the government is essentially limitless" under the Patriot Act's business records provision.
Questions of law
Whether the National Security Agency or FBI has the legal authority to demand that an Internet company divulge a hashed password, salt, and algorithm remains murky.
"This is one of those unanswered legal questions: Is there any circumstance under which they could get password information?" said Jennifer Granick, director of civil liberties at Stanford University's Center for Internet and Society. "I don't know."
Granick said she's not aware of any precedent for an Internet company "to provide passwords, encrypted or otherwise, or password algorithms to the government -- for the government to crack passwords and use them unsupervised." If the password will be used to log in to the account, she said, that's "prospective surveillance," which would require a wiretap order or Foreign Intelligence Surveillance Act order.
If the government can subsequently determine the password, "there's a concern that the provider is enabling unauthorized access to the user's account if they do that," Granick said. That could, she said, raise legal issues under the Stored Communications Act and the Computer Fraud and Abuse Act.
The Justice Department has argued in court proceedings before that it has broad legal authority to obtain passwords. In 2011, for instance, federal prosecutors sent a grand jury subpoena demanding the password that would unlock files encrypted with the TrueCrypt utility.
The Florida man who received the subpoena claimed the Fifth Amendment, which protects his right to avoid self-incrimination, allowed him to refuse the prosecutors' demand. In February 2012, the U.S. Court of Appeals for the Eleventh Circuit agreed, saying that because prosecutors could bring a criminal prosecution against him based on the contents of the decrypted files, the man "could not be compelled to decrypt the drives."
In January 2012, a federal district judge in Colorado reached the opposite conclusion, ruling that a criminal defendant could be compelled under the All Writs Act to type in the password that would unlock a Toshiba Satellite laptop.
Both of those cases, however, deal with criminal proceedings when the password holder is the target of an investigation -- and don't address when a hashed password is stored on the servers of a company that's an innocent third party.
"If you can figure out someone's password, you have the ability to reuse the account," which raises significant privacy concerns, said Seth Schoen, a senior staff technologist at the Electronic Frontier Foundation.
Last updated at 8:00 p.m. PT with comment from Yahoo, which responded after this article was published.
Disclosure: McCullagh is married to a Google employee not involved with this issue.
http://news.cnet.com/8301-13578_3-57595529-38/feds-tell-web-firms-to-turn-over-user-account-passwords/
Senate committee questions bank control of warehouses, pipelines, infrastructure
Submitted by cpowell on 2013-07-24
Senate Scrutiny of Potential Risk in Markets for Commodities
By Edward Wyatt
The New York Times
Tuesday, July 23, 2013
http://www.nytimes.com/2013/07/24/business/senate-panel-examines-potential-risks-in-big-banks-involvement-in-commodities.html
(special thanks to the cork)
WASHINGTON -- Wall Street's lucrative commodities businesses came to the fore here Tuesday as a Senate panel questioned whether banks should be allowed to control warehouses, pipelines, and other infrastructure used to store and transport essential goods.
The hearing, convened by the Senate Financial Institutions and Consumer Protection subcommittee, came as Goldman Sachs, JPMorgan Chase, and others face growing scrutiny over their role in the commodities markets and the extent to which their activities can inflate prices paid by manufacturers and consumers. The Federal Reserve is reviewing the potential risks posed by the operations, which have generated many billions of dollars in profits for the banks.
The hearing followed an article in The New York Times on Sunday that explored the operations of warehouses controlled in part by Goldman Sachs. The bank's tactics, along with those of other financial players, have inflated the price of aluminum and ultimately cost consumers billions of dollars, an investigation by The Times found. The Commodity Futures Trading Commission is now gathering information on the warehouse operations.
Several witnesses at Tuesday's hearings warned that letting the country's largest financial institutions own commodities units that store and ship vast quantities of metals, oil, and the other basic building blocks of the economy could pose grave risks to the financial system. The ability of those bank subsidiaries to gather nonpublic information on commodities stores and shipping also could give the banks an unfair advantage in the markets and cost consumers billions of dollars, the witnesses said.
Representatives from the financial industry did not testify on Tuesday, but Goldman Sachs for the first time addressed its role in the aluminum market. In a statement posted on its Web site, Goldman said that its ownership of aluminum warehouses did not affect prices of the metal, in part because only 5 percent of the aluminum that is used in manufacturing passes through the warehouses owned by Goldman and others. Goldman controls 27 warehouses in the Detroit area that are used to store aluminum for customers.
In addition, Goldman said, delivered aluminum prices are nearly 40 percent lower than they were in 2006. During the financial crisis, warehoused inventories of aluminum more than tripled, the company said, because of weakened consumer demand.
The Times investigation found that Goldman's warehouse subsidiary moved large amounts of aluminum among its warehouses daily, a process that lengthened the storage time and increased the premium that was added to the basic price of aluminum. The London Metal Exchange, which sets the rules under which the metals warehouses operate, said in a separate statement that it was working with the industry to amend the delivery obligations of warehouse companies with long waiting periods.
Even with the waiting periods, "there is no reported shortage of aluminum in the market," the exchange said. "Consumers can continue to buy directly from producers as they always have done."
Saule T. Omarova, a law professor at the University of North Carolina who has studied the issue, told the subcommittee that there was one other company that was an early leader in combining the practice of moving physical commodities with the financing of market activity -- Enron.
The comparison was seized upon by Senator Elizabeth Warren, a Massachusetts Democrat. "The notion that two of largest financial companies are adopting a business method pioneered by Enron," she said, "suggests that this movie will not end well."
Major beverage companies have complained about the maneuvers. Tim Weiner, a MillerCoors executive, told the panel on Tuesday that while consumers might not think they have much at stake from tons of aluminum bars stored in a warehouse near Detroit, the actions of Goldman and others have raised prices, cost jobs, and hindered innovation.
That is in part because waiting times for customers who want to retrieve their metals purchases have grown to more than 16 months since Goldman Sachs took over the warehouses three years ago.
Before Goldman arrived, the average wait was six weeks.
Imagine going to a liquor store to buy a case of beer and taking it up to the cash register to pay, Mr. Weiner said. Then instead of taking the case of beer to your car, the clerk told you to visit the store's warehouse, where you can retrieve the beer in 16 months.
Goldman Sachs' "Warehouse Shuffle" Just Cost You $5 Billion
Jul 25, 2013
By: Money_Morning
David Zeiler writes: It's just another game for Goldman Sachs Group (NYSE: GS) - a "warehouse shuffle" that moves aluminum around while the big bank collects rent on the metal.
Although the rent on the stored aluminum - Goldman isn't allowed to actually own the commodity - is just pennies a day, the vast amount of the metal it has stored in its 27 Detroit warehouses and the "warehouse shuffle" strategy that enables it to extend the rental period for months on end adds up.
Through the Metro International Trade Services subsidiary it bought in 2010, Goldman has accumulated 1.4 million tons of aluminum, which it stores at about 48 cents per ton per day. That's about $672,000 per day of revenue - nearly half a billion a year.
Experts say the warehouse shuffle game ultimately raises the price of aluminum to manufacturers - everything from beer and soda companies to automakers. That extra cost, about $5 billion over the past three years, is passed on to consumers - you and me.
"What Goldman is doing is a new twist on an old game, it's called daisy-chaining," said Money Morning Capital Wave Strategist Shah Gilani, who wrote on this topic himself on his Wall Street Insights and Indictments web site. "The story here is that Goldman is allowed, by the Fed and the SEC and Congress, to own these warehouses in order to get around rules governing storing metals to prevent price manipulation to manipulate the price of aluminum higher, which costs us all more."
And Gilani isn’t happy about it.
“Talk about redistribution policies, this is the same old game with a newer twist: Take from the middle class and give to the biggest, richest banks so they can pay their legal bills and settlement fines to keep the coffers of politicians full. It's sickening,” he said.
Anyone who watches the Big Banks of Wall Street will not be surprised to learn that Goldman isn't the only bank playing the game, and aluminum isn't the only commodity they play with...
How the Goldman Sachs Warehouse Shuffle Works
Although the banks can't own the commodities themselves, they can store commodities for others and charge rent.
That's why Goldman bought Metro International in 2010. That same year Swiss-based Glencore International bought Italy's Pacorini for the same reason. Glencore does the same warehouse shuffle at its facilities in the Netherlands.
Metro immediately started stockpiling aluminum, with its stores rising from 50,000 tons in 2008 to 850,000 in 2010 to 1.5 million now.
The entities that own the aluminum, like the beer and soda companies, pay companies like Metro to store their aluminum until they need it.
Before Goldman bought Metro, it only took about six months to get aluminum out of a Metro warehouse; since 2010 the wait has stretched to 16 months or more, with Goldman collecting rent all the while.
According to the London Metal Exchange, the rule-making body that oversees 719 metal commodity warehouses around the world, warehouse operators are required to move at least 3,000 tons of aluminum out every day.
At Metro, that means loading trucks with aluminum from one warehouse and moving it to another warehouse, then reloading the truck with different aluminum for transport back to the original warehouse.
The metal moves, as per the rule, but stays in Metro's control. Not only does this warehouse shuffle generate rental income for Goldman, but keeping large amounts of aluminum in storage has caused the spot price for the metal to double since 2010.
"It's a totally artificial cost," Jorge Vazquez, managing director at Harbor Aluminum Intelligence, a commodities consulting firm, told The New York Times. "It's a drag on the economy. Everyone pays for it."
Why Goldman Sachs Gets Away With It
While many have complained about the warehouse shuffle and its impact on aluminum prices, it's all completely legal. And Goldman has denied that it delays aluminum shipments on purpose.
But those who should be doing something about it have mostly stood by doing nothing.
The London Metal Exchange, which could create more stringent rules, until last year was controlled by its members -- you know, big banks like Goldman Sachs. What's more, the LME gets a 1% cut of all warehouse rents worldwide, so it has an incentive not to rock the boat.
The new owners of the LME have proposed some new rules to take effect in April 2014 that they say would curb the warehouse shuffle. But it may well turn out that the new regulations, like the rule requiring 3,000 tons move per day, will be just as easily dodged.
In the U.S., no government entity seems particularly interested in cracking down on Goldman's aluminum shenanigans.
Indeed, they allowed it to happen. The Federal Reserve and Congress loosened restrictions in the 1990s that previously prevented Big Banks from having anything to do with managing physical commodities.
The Commodity Futures Trading Commission, meanwhile, claims it has no jurisdiction over Goldman's activities because the actual trading occurs in London.
The Senate Banking Committee held a hearing Tuesday to gather information from several critics of the warehouse shuffle, but it's a Grand Canyon-sized gap from a hearing to enacting legislation.
Business as Usual for the Big Banks
The same rules that allow Goldman to play games with aluminum also allow the Big Banks to dabble in other commodities.
Experts have estimated that similar games with oil, where the Big Banks can own warehouses, tankers, pipelines and other infrastructure, cost consumers $200 billion a year.
"When Wall Street banks control the supply of both commodities and financial products, there's a potential for anti-competitive behavior and manipulation," Sen. Sherrod Brown, D-OH, a member of the Senate Banking Committee, told the Huffington Post. "It also exposes these megabanks -- and the entire financial system -- to undue risk."
Another expert, Joshua Rosner, managing director at independent research firm Graham Fisher & Co, has warned that letting Big Banks manage physical commodities encourages the sharing of inside information with their trading desks, who often make big bets on derivatives tied to commodities.
"If banks own storage, distribution, transmission or generating assets, they have the ability to manipulate prices for the benefit of their own balance sheet, to the disadvantage of the public interest, which is why they were prohibited from such activities after the Great Depression to the passage of Gramm-Leach-Bliley in 1999," said Rosner, who also testified at Tuesday's Senate hearing.
Despite the protests, it's likely that the Big Banks will continue to get more heavily involved in commodities.
In fact, they've already identified another industrial metal that could become far more lucrative than aluminum: copper.
But given what's happened with aluminum and the warehouse shuffle, investors should have learned a lesson - it's better to play along with the Big Banks than to fight them.
Source :http://moneymorning.com/2013/07/24/goldman-sachs-warehouse-shuffle-just-cost-you-5-billion/
Money Morning/The Money Map Report
Goldman Sachs' "Warehouse Shuffle" Just Cost You $5 Billion
Jul 25, 2013 - 02:27 PM GMT
By: Money_Morning
David Zeiler writes: It's just another game for Goldman Sachs Group (NYSE: GS) - a "warehouse shuffle" that moves aluminum around while the big bank collects rent on the metal.
Although the rent on the stored aluminum - Goldman isn't allowed to actually own the commodity - is just pennies a day, the vast amount of the metal it has stored in its 27 Detroit warehouses and the "warehouse shuffle" strategy that enables it to extend the rental period for months on end adds up.
Through the Metro International Trade Services subsidiary it bought in 2010, Goldman has accumulated 1.4 million tons of aluminum, which it stores at about 48 cents per ton per day. That's about $672,000 per day of revenue - nearly half a billion a year.
Experts say the warehouse shuffle game ultimately raises the price of aluminum to manufacturers - everything from beer and soda companies to automakers. That extra cost, about $5 billion over the past three years, is passed on to consumers - you and me.
"What Goldman is doing is a new twist on an old game, it's called daisy-chaining," said Money Morning Capital Wave Strategist Shah Gilani, who wrote on this topic himself on his Wall Street Insights and Indictments web site. "The story here is that Goldman is allowed, by the Fed and the SEC and Congress, to own these warehouses in order to get around rules governing storing metals to prevent price manipulation to manipulate the price of aluminum higher, which costs us all more."
And Gilani isn’t happy about it.
“Talk about redistribution policies, this is the same old game with a newer twist: Take from the middle class and give to the biggest, richest banks so they can pay their legal bills and settlement fines to keep the coffers of politicians full. It's sickening,” he said.
Anyone who watches the Big Banks of Wall Street will not be surprised to learn that Goldman isn't the only bank playing the game, and aluminum isn't the only commodity they play with...
How the Goldman Sachs Warehouse Shuffle Works
Although the banks can't own the commodities themselves, they can store commodities for others and charge rent.
That's why Goldman bought Metro International in 2010. That same year Swiss-based Glencore International bought Italy's Pacorini for the same reason. Glencore does the same warehouse shuffle at its facilities in the Netherlands.
Metro immediately started stockpiling aluminum, with its stores rising from 50,000 tons in 2008 to 850,000 in 2010 to 1.5 million now.
The entities that own the aluminum, like the beer and soda companies, pay companies like Metro to store their aluminum until they need it.
Before Goldman bought Metro, it only took about six months to get aluminum out of a Metro warehouse; since 2010 the wait has stretched to 16 months or more, with Goldman collecting rent all the while.
According to the London Metal Exchange, the rule-making body that oversees 719 metal commodity warehouses around the world, warehouse operators are required to move at least 3,000 tons of aluminum out every day.
At Metro, that means loading trucks with aluminum from one warehouse and moving it to another warehouse, then reloading the truck with different aluminum for transport back to the original warehouse.
The metal moves, as per the rule, but stays in Metro's control. Not only does this warehouse shuffle generate rental income for Goldman, but keeping large amounts of aluminum in storage has caused the spot price for the metal to double since 2010.
"It's a totally artificial cost," Jorge Vazquez, managing director at Harbor Aluminum Intelligence, a commodities consulting firm, told The New York Times. "It's a drag on the economy. Everyone pays for it."
Why Goldman Sachs Gets Away With It
While many have complained about the warehouse shuffle and its impact on aluminum prices, it's all completely legal. And Goldman has denied that it delays aluminum shipments on purpose.
But those who should be doing something about it have mostly stood by doing nothing.
The London Metal Exchange, which could create more stringent rules, until last year was controlled by its members -- you know, big banks like Goldman Sachs. What's more, the LME gets a 1% cut of all warehouse rents worldwide, so it has an incentive not to rock the boat.
The new owners of the LME have proposed some new rules to take effect in April 2014 that they say would curb the warehouse shuffle. But it may well turn out that the new regulations, like the rule requiring 3,000 tons move per day, will be just as easily dodged.
In the U.S., no government entity seems particularly interested in cracking down on Goldman's aluminum shenanigans.
Indeed, they allowed it to happen. The Federal Reserve and Congress loosened restrictions in the 1990s that previously prevented Big Banks from having anything to do with managing physical commodities.
The Commodity Futures Trading Commission, meanwhile, claims it has no jurisdiction over Goldman's activities because the actual trading occurs in London.
The Senate Banking Committee held a hearing Tuesday to gather information from several critics of the warehouse shuffle, but it's a Grand Canyon-sized gap from a hearing to enacting legislation.
Business as Usual for the Big Banks
The same rules that allow Goldman to play games with aluminum also allow the Big Banks to dabble in other commodities.
Experts have estimated that similar games with oil, where the Big Banks can own warehouses, tankers, pipelines and other infrastructure, cost consumers $200 billion a year.
"When Wall Street banks control the supply of both commodities and financial products, there's a potential for anti-competitive behavior and manipulation," Sen. Sherrod Brown, D-OH, a member of the Senate Banking Committee, told the Huffington Post. "It also exposes these megabanks -- and the entire financial system -- to undue risk."
Another expert, Joshua Rosner, managing director at independent research firm Graham Fisher & Co, has warned that letting Big Banks manage physical commodities encourages the sharing of inside information with their trading desks, who often make big bets on derivatives tied to commodities.
"If banks own storage, distribution, transmission or generating assets, they have the ability to manipulate prices for the benefit of their own balance sheet, to the disadvantage of the public interest, which is why they were prohibited from such activities after the Great Depression to the passage of Gramm-Leach-Bliley in 1999," said Rosner, who also testified at Tuesday's Senate hearing.
Despite the protests, it's likely that the Big Banks will continue to get more heavily involved in commodities.
In fact, they've already identified another industrial metal that could become far more lucrative than aluminum: copper.
But given what's happened with aluminum and the warehouse shuffle, investors should have learned a lesson - it's better to play along with the Big Banks than to fight them.
Source :http://moneymorning.com/2013/07/24/goldman-sachs-warehouse-shuffle-just-cost-you-5-billion/
Money Morning/The Money Map Report
Why Is Silver Manipulation So Absurd?
Silver Prices Are Blatantly Rigged
By Adam English 2013-07-23
Every time someone in America buys electronics or a car — or even cracks open a can of beer — Goldman Sachs gets paid.
Three years ago, this too-big-to-fail bank capitalized on special rules created by the Federal Reserve and authorized by Congress by buying an obscure company called Metro International Trade Services. It is one of the largest warehousing companies for aluminum in the country.
Since then, it has manipulated the system to pull in massive profits.
In spite of tepid demand for aluminum worldwide after the Great Recession, the amount of time required for aluminum delivery has increased 20-fold — from six weeks to 16 months — since the company was purchased. This could be explained by shortages or logistical issues, if any existed. The company is actively making the process inefficient.
Since 2008, the stockpile of aluminum grew from 50,000 tons in 2008 to a massive 1.5 million tons today. Industry rules require at least 3,000 tons be moved out of warehouses each day.
However, instead of delivering the metal to buyers, Goldman is moving just shuffling the metal between warehouses to skirt the intent of the rules.
The warehouses collect rent for each day the metal is stored. Storage costs are a primary factor for the premium added to the price difference between the spot market and the actual price charged for delivery.
Estimates show this premium has doubled since Goldman's acquisition. For every ton delivered, an extra $114 is charged. With how much aluminum is used in everything from soda cans to automobiles, estimates put the extra cost to American consumers at $5 billion over three years.
This business has been so lucrative that Goldman plans to expand the operations. It recently filed documents with the SEC outlining its plan to store copper in the same warehouses.
No Exception to the Rule
The list of manipulations by mega banks touches every corner of finance.
Virtually every commodity has been hit by massive positions that influence prices for illicit gains...
LIBOR and delaying interest rate information amounted to $880 trillion in manipulation alone, and affected every mortgage and loan worldwide. And JPMorgan is all over the news, turning money-losing power plants into profit centers by manipulating the market and being paid for not firing up the plants.
But bring up any of these topics, and you'll hear the same cynical responses. Mention silver manipulation, and it will be dismissed as fringe conspiracy theory.
In an age where everything is being manipulated, it defies belief that somehow silver prices aren't being abused for illicit gains. In fact, it requires willful ignorance. The fact is, there is plenty of evidence staring everyone right in the face.
Let's just have a look at JPMorgan...
JPMorgan's Silver Cash Grab
JPMorgan inherited a massive amount of silver shorts priced between $20 and $21 when it took over Bear Stearns. Combined with HSBC, the two mega banks covered 85% of all silver shorts.
That right there is a solid case for manipulation — because the short position was so massive compared to physical silver trading and long positions. What's worse, the U.S. Treasury created the situation.
If the free market resolved the situation, silver would have more than doubled as the short position was covered or evaporated.
The massive position was maintained for years because it wasn't easy to wind down. Any large-scale attempts to unwind the position would be countered by other big traders and result in a loss. JPMorgan didn't have to, though; it simply needed to rig the system to turn a buck.
A precious metal trader named Andrew Maguire sent detailed information in an email to the CFTC on Feb. 3, 2010, about what to expect in two days after he noticed signals from JPMorgan and HSBC traders using after-hours high-frequency trades to crush prices.
His description was perfectly accurate. The trader, selling four hundred contracts per second, dumped 45,000 contracts into the market. Each was for 5,000 troy ounces for a grand total of 7,000 tonnes. The seller then suddenly shifted and started purchasing everything he could. Still moving far faster than other traders, he or she walked with $3.6 billion.
In more recent history, JPMorgan has been holding about 25% of the silver short market with the largest eight commercial silver shorts account for 50% to 60%. Estimates put paper silver positions at 143 times the actual amount of physical silver traded.
Massive volumes of sell orders are placed and canceled in fractions of a second by them. The lower sell prices still appear in market data for anyone that cannot handle trading by the millisecond, leading to panic selling by other (much slower) traders.
The high-frequency trading system then snaps up the positions for profit. After all, they never sold anything to begin with... they simply maintained short positions and canceled sales to buy at discounts.
Silver is Not an Exception
With the gross amounts of manipulation we've seen across every sector of finance, I cannot believe how silver price fixing has dodged every bullet and has still not gained widespread acceptance.
Virtually every commodity, anything with an interest rate, as well as every type of financial instrument is dominated by a select few massive positions that move in tandem.
Silver has some of the most lopsided, large positions in history — yet manipulation of the white metal is scoffed at.
It is beyond crazy to think mega banks would make silver the sole exception to the rule.
Two separate lawsuits were filed in 2010 and 2011 and later combined in the Manhattan Federal Court. But nothing substantial came from it. HSBC convinced a judge to remove them from the case, then the judge threw out the entire case earlier this year.
In spite of the overwhelming and obvious proof of manipulation, the judge decided there was no absolute proof of "intent to cause artificial prices to exist." Apparently, turning a massive profit by controlling the market isn't indicative of intent at all.
The one remaining hope for an end to the silver price collusion is a change in Commodity Futures Trading Commission (CFTC) rules to stop manipulation through high-frequency order cancellations.
On Monday, the CFTC used its new authority from the 2012 Dodd-Frank law for the first time.
A small firm called Panther Energy Trading is being charged with manipulation of 18 U.S.-based contracts — including natural gas, crude oil, metals, foreign currencies, and financial indices — through the CME Group's Globex trading platform.
Bart Chilton, head of the CFTC, has even publicly stated that silver prices are subject to "fraudulent influences," and the parties behind it should be prosecuted.
We can only hope Chilton will follow through on the blatantly obvious proof of silver manipulation that he has openly acknowledged. Maybe then whistleblowers like Andrew Maguire will be vindicated, and the indefensible dismissal of reality will end.
Take Care,
Adam English
http://outsiderclub.com/why-is-silver-manipulation-so-absurd
Why Is Silver Manipulation So Absurd?
Silver Prices Are Blatantly Rigged
By Adam English 2013-07-23
Every time someone in America buys electronics or a car — or even cracks open a can of beer — Goldman Sachs gets paid.
Three years ago, this too-big-to-fail bank capitalized on special rules created by the Federal Reserve and authorized by Congress by buying an obscure company called Metro International Trade Services. It is one of the largest warehousing companies for aluminum in the country.
Since then, it has manipulated the system to pull in massive profits.
In spite of tepid demand for aluminum worldwide after the Great Recession, the amount of time required for aluminum delivery has increased 20-fold — from six weeks to 16 months — since the company was purchased. This could be explained by shortages or logistical issues, if any existed. The company is actively making the process inefficient.
Since 2008, the stockpile of aluminum grew from 50,000 tons in 2008 to a massive 1.5 million tons today. Industry rules require at least 3,000 tons be moved out of warehouses each day.
However, instead of delivering the metal to buyers, Goldman is moving just shuffling the metal between warehouses to skirt the intent of the rules.
The warehouses collect rent for each day the metal is stored. Storage costs are a primary factor for the premium added to the price difference between the spot market and the actual price charged for delivery.
Estimates show this premium has doubled since Goldman's acquisition. For every ton delivered, an extra $114 is charged. With how much aluminum is used in everything from soda cans to automobiles, estimates put the extra cost to American consumers at $5 billion over three years.
This business has been so lucrative that Goldman plans to expand the operations. It recently filed documents with the SEC outlining its plan to store copper in the same warehouses.
No Exception to the Rule
The list of manipulations by mega banks touches every corner of finance.
Virtually every commodity has been hit by massive positions that influence prices for illicit gains...
LIBOR and delaying interest rate information amounted to $880 trillion in manipulation alone, and affected every mortgage and loan worldwide. And JPMorgan is all over the news, turning money-losing power plants into profit centers by manipulating the market and being paid for not firing up the plants.
But bring up any of these topics, and you'll hear the same cynical responses. Mention silver manipulation, and it will be dismissed as fringe conspiracy theory.
In an age where everything is being manipulated, it defies belief that somehow silver prices aren't being abused for illicit gains. In fact, it requires willful ignorance. The fact is, there is plenty of evidence staring everyone right in the face.
Let's just have a look at JPMorgan...
JPMorgan's Silver Cash Grab
JPMorgan inherited a massive amount of silver shorts priced between $20 and $21 when it took over Bear Stearns. Combined with HSBC, the two mega banks covered 85% of all silver shorts.
That right there is a solid case for manipulation — because the short position was so massive compared to physical silver trading and long positions. What's worse, the U.S. Treasury created the situation.
If the free market resolved the situation, silver would have more than doubled as the short position was covered or evaporated.
The massive position was maintained for years because it wasn't easy to wind down. Any large-scale attempts to unwind the position would be countered by other big traders and result in a loss. JPMorgan didn't have to, though; it simply needed to rig the system to turn a buck.
A precious metal trader named Andrew Maguire sent detailed information in an email to the CFTC on Feb. 3, 2010, about what to expect in two days after he noticed signals from JPMorgan and HSBC traders using after-hours high-frequency trades to crush prices.
His description was perfectly accurate. The trader, selling four hundred contracts per second, dumped 45,000 contracts into the market. Each was for 5,000 troy ounces for a grand total of 7,000 tonnes. The seller then suddenly shifted and started purchasing everything he could. Still moving far faster than other traders, he or she walked with $3.6 billion.
In more recent history, JPMorgan has been holding about 25% of the silver short market with the largest eight commercial silver shorts account for 50% to 60%. Estimates put paper silver positions at 143 times the actual amount of physical silver traded.
Massive volumes of sell orders are placed and canceled in fractions of a second by them. The lower sell prices still appear in market data for anyone that cannot handle trading by the millisecond, leading to panic selling by other (much slower) traders.
The high-frequency trading system then snaps up the positions for profit. After all, they never sold anything to begin with... they simply maintained short positions and canceled sales to buy at discounts.
Silver is Not an Exception
With the gross amounts of manipulation we've seen across every sector of finance, I cannot believe how silver price fixing has dodged every bullet and has still not gained widespread acceptance.
Virtually every commodity, anything with an interest rate, as well as every type of financial instrument is dominated by a select few massive positions that move in tandem.
Silver has some of the most lopsided, large positions in history — yet manipulation of the white metal is scoffed at.
It is beyond crazy to think mega banks would make silver the sole exception to the rule.
Two separate lawsuits were filed in 2010 and 2011 and later combined in the Manhattan Federal Court. But nothing substantial came from it. HSBC convinced a judge to remove them from the case, then the judge threw out the entire case earlier this year.
In spite of the overwhelming and obvious proof of manipulation, the judge decided there was no absolute proof of "intent to cause artificial prices to exist." Apparently, turning a massive profit by controlling the market isn't indicative of intent at all.
The one remaining hope for an end to the silver price collusion is a change in Commodity Futures Trading Commission (CFTC) rules to stop manipulation through high-frequency order cancellations.
On Monday, the CFTC used its new authority from the 2012 Dodd-Frank law for the first time.
A small firm called Panther Energy Trading is being charged with manipulation of 18 U.S.-based contracts — including natural gas, crude oil, metals, foreign currencies, and financial indices — through the CME Group's Globex trading platform.
Bart Chilton, head of the CFTC, has even publicly stated that silver prices are subject to "fraudulent influences," and the parties behind it should be prosecuted.
We can only hope Chilton will follow through on the blatantly obvious proof of silver manipulation that he has openly acknowledged. Maybe then whistleblowers like Andrew Maguire will be vindicated, and the indefensible dismissal of reality will end.
Take Care,
Adam English
http://outsiderclub.com/why-is-silver-manipulation-so-absurd
The Most Rigged Economic Indicators
Jul 23, 2013 - 02:59 PM GMT
By: Money_Morning
Garrett Baldwin writes: On August 2, the Bureau of Labor Statistics will report the official unemployment rate. But this number doesn't tell the accurate story of the jobs picture here in the United States.
That's usually the case with government-produced economic indicators. Whatever the government figure will say, it will not truly reflect reality. Simply put, it's a rigged number.
When it comes to cheating the numbers, nobody does it better than Uncle Sam.
U.S. investors rely on accurate government data in order to make investment decisions in various sectors of the economy.
But what if these figures reflected negative headlines on a near-constant basis? It wouldn't instill much confidence. And it certainly would cost a lot of people in Washington their jobs.
That's why Uncle Sam plays games with the numbers and presents a far rosier picture of the world to low-information voters and investors. But we're paying attention here at Money Morning, and that's why we're holding a spotlight on the fuzzy math in Washington.
Counting down, here are the four most rigged government statistics in America today:
4) Poverty Levels: Just in case we ever need to justify massive redistribution of wealth in the U.S., we need look no further than a recent decision by the Obama administration to redefine poverty in the United States.
The old way of measuring poverty was based on purchasing power, meaning just how much meat and potatoes can one purchase with the income he or she has.
But the new definition brought into the White House in 2010 is a measure of comparative purchasing power. This means, how much meat and potatoes can you by in comparison to your neighbors.
This fixes a statistical figure to a percentage of Americans' buying power in comparison to the median income level and the richest in the U.S. When you look at this figure, it is unfair that some people can buy 100 steaks when others can only purchase five.
Here's why it's a rigged trick.
If Americans tomorrow become two times more productive, and income doubled for everyone in the country, there would still be the same level of poverty, because there would still be a statistical comparison of purchasing power.
This means that poverty will always be an epidemic in the United States, even if individuals were given more opportunity and produced more. The statistical figure breeds class envy over the long-term.
3) Consumer Price Index: Famed PIMCO bond manager Bill Gross once deemed the U.S. Consumer Price Index an "haute con job." And for good reason.
The CPI measures the price level of goods and services purchased by consumers and is one of two definitions for inflation (the other being a calculated statistic from money supply figures).
Unfortunately, CPI is a very broken economic indicator.
Providing a measure of inflation, the CPI tells us just how much the price of goods is increasing over time.
But here's the problem. The Core CPI number excludes food and energy from its formula. This is done because "these goods show more price volatility than the remainder of the CPI."
But that's very convenient given that rising energy and food costs push up the price of many other products and services that Americans purchase.
One can tell this figure is rigged just by factoring in just how under-reported the cost of energy is alone. In 2008, when oil hit $150 a barrel and food prices were near all-time highs, the official CPI was just 4%. With the cost of food and energy at record highs, the government tried to claim that the CPI was a mere 4% inflation. In reality, the real level of inflation was at least double this figure.
But there's a reason why government does this.
To overstate the economy's growth figures. Inflation is naturally bad for growth rates - particularly in GDP, which we'll look at in a minute.
If GDP grows by 2% and inflation was 1%, then real growth was 1% in simple terms. That's good for politicos, but the reality is worse of anyone trying to maintain a standard of living. Rigging the CPI allows government to rig other numbers, including wages, GDP, and purchasing power.
2) Gross Domestic Product: GDP is a measure of consumer spending, investment by industry, and government spending, plus the difference between exports and imports.
Talk about a con job. Annual GDP is one of the most rigged government figures.
There are two reasons that this is a rigged figure.
First, it doesn't properly take inflation into the equation, meaning that the real GDP (growth minus inflation) doesn't truly reflect the value of the production over time.
Yes, we have an annual GDP of $16 trillion, but how does that figure compare to the size the economy would be measured in the value of the dollar 50 years ago. In real terms that figure would be $2 trillion. The cumulative rate of inflation in the U.S. economy since the United States went off the Gold Standard in 1971 is 86.3%.
Second, one of the best tools of rigging the books is the "readjustment" period. Since there is a lag in available information to confirm and complete its estimate, the Commerce Department's Bureau of Economic Analysis regularly puts out a number to quantify the quarterly growth figure.
Then, as time passes, the BEA is able to readjust that figure as more information comes in. All too often, however, we find that the readjustment is lower than the previous estimate, meaning that the initial figure shown in the headlines is a gross exaggeration.
Each quarter we've seen continued overstatements, only to have the BEA revise GDP growth downward and claim ignorance later. Finally, remember that so long as government can borrow money or print dollars, it can artificially inflate GDP to any level it wants to.
Of course, there are consequences, which is why the government portion of this figure must always be monitored.
In 2011, 38.9% of all U.S. spending was done by governments at the local, state, and Federal level, a staggering figure that retards real growth in the economy (all money spent by government is either taxed or borrowed).
To put just how high that figure is, we spent more money at the government level than Canada (by percentage of GDP), and nearly twice the rate of China - a communist nation. The freest economies in the world typically reflect lower government spending, like Chile, Hong Kong, and Singapore.
1) The Unemployment Rate: No figure is more important to a president and members of Congress than the unemployment rate, which is why they officially rigged it for good in 1994.
There are two sets of the unemployment rate in the United States. The first is the U-3 or "Official Unemployment Rate." This masked rate gets in the news and fools the low-information voter into seeing the economy through rose-colored glasses.
But the U-3 unemployment index ignores millions of Americans who have been out of work for an extended period and have given up looking for work. It also counts part-time workers. This change began under Lyndon Johnson and has compounded under every Presidency since. As you can see in the chart above, the civilian labor force rate is now down to a 30-year low, as millions of disenchanted Americans have left the job market, gone on disability, and are not seeking a job (a requirement to be counted in the U-3 rate).
As of June 2013, the labor participation rate stood at 63.5%. If the workforce population were the same size today as it was in January 2009, the official unemployment rate would be above 10%.
Currently the broader measure of unemployment, the U-6 rate, sits just shy of 15%. But some economists have argued that the real unemployment rate in the U.S. sits around 21% to 22% when you factor in all of the working-age Americans who are able to work, but can't find a job and undocumented workers who are part of the labor force and are also jobless.
The government has been rigging the books as long as politicians have been trying to maintain a grip on power. I wouldn't go bowling with anyone in Washington and let them keep score.
So what other numbers do you know about that are rigged?
Education, test scores, crime data? Let us know about the tricks your local or state government is playing with the numbers with your comments below.
And for how the government decided to change the GDP calculation to make us look richer, check this out.
Source :http://moneymorning.com/2013/07/22/the-four-most-rigged-economic-indicators/
http://www.marketoracle.co.uk/Article41541.html
If you believe gold’s going to go up, buy silver
Gold’s more volatile sibling, silver, could be a considerably better investment in a rising gold price scenario, but it still depends on whether or not gold has bottomed.
Lawrence Williams
Tuesday, 23 Jul 2013
(special thanks to basserdan)
LONDON (Mineweb) -
In yesterday’s trade gold moved up nearly $40 an ounce and has maintained its higher level overnight. Silver was initially slow to move, but then also managed a gain of close on $1 per ounce.
While still far short of getting anywhere near their levels of two years ago, this does look as though it could be the start of a general recovery in precious metals prices. The big question, of course, is: is this the beginning of an upwards re-rating, or will we see another stutter and fall back? And, if the former, how high can the momentum carry it?
If the gold pundits are right in their assumptions, then this could indeed be the start of something big. The gold bulls believe the big money has been driving gold downwards, closing off short positions and is now poised for taking it back up again – and this time, if they have indeed managed to exit the shorts, then the sky could be the limit. Gold could be set for a rise equally as fast, and as steep as the recent downturns – or so the argument goes.
But, there is one big flaw in the assumptions. On the way down it was strongly believed that the big money taking gold downwards was in collusion with the central banks of this world, and the U.S. Fed in particular, and while the big money can perhaps now see big profits on the horizon through buying low and then helping drive up the price, surely this is contrary to central bank desires?
While most central banks will deny that gold is, in reality, money any more, they do claim to hold vast reserves of the precious metal and it does tend to be viewed as an indicator of currency strength and thus of economic health.Add to that the theory that the central banks have leased out so much gold that their vaults may be rather emptier than official figures would suggest, a move to replenish these becomes more and more costly, and difficult to achieve, if gold is back on the rising path again.
Silver is not beset by quite the same strictures though. It’s not a metal the central banks care about overmuch so is thus even more open to overt manipulation by the big money than its yellow sibling. Regardless, it still tends to move with gold, but in a more exaggerated manner.
Some analysts point to a big supply/demand surplus, but that ignores investment demand (which they do tend to take into account with gold) which is in reality what actually drives the price. As gold fell, silver fell further with the gold:silver ratio currently sitting at around 65.
Over the past century this ratio has fluctuated between peaks of around 100 and 15, but for part of this silver was still a monetary metal, while now, arguably, its price is driven by jewellery, industrial and investment factors, with the latter the key in terms of price fluctuations.
The last time the gold: silver ratio got down to its oft touted ‘historic’ level of 16:1 was when the Hunt Brothers tried, and nearly succeeded, in cornering the market. Unless one or more of the megabanks tries the same thing again, and this is doubtful as well as probably illegal, we don’t see the ratio ever returning to this kind of level without its original monetary underpinning.
More recently the ratio has moved between 85 and 35, but mostly it sits in the 45 to 65 range, with the ratio moving lower when gold rises and higher when gold falls which gives silver its reputation for its higher volatility among the precious metals.
Thus, were gold to climb back to its $1500 level (a rise of around 13%) in the relatively near future, as many reckon and which can’t be beyond the bounds of possibility, then a ratio of 65, as at present would see silver at $23 (a similar rise), but at a ratio of 45 silver would get to $33 – a much bigger increase of around 62%. Even at a comparably small fall in the ratio to say 57, a level seen only 3 months ago, silver would rise by 30%.
Given the gold:silver ratio’s propensity to come down as gold rises, in a stronger gold price scenario then a sharp reduction in the gold:silver ration, and thus a far bigger percentage increase in the silver price, would seem more likely than not.
Yes, it is perhaps more of a gamble to invest in silver rather than gold, because of the increased volatility factor as silver investors have found during gold’s poor performance of late. But, if you firmly believe that gold has bottomed and is set to start to rise again then silver looks to be the better bet in terms of percentage appreciation.
Silver guru Ted Butler would agree. In his latest weekly review he points to three years ago when both the gold:silver ratio and the absolute gold price were at similar levels to those seen recently (gold was at around $1250 and silver at $18).
From that point gold rallied to a peak of $1920 around a year later ( a gain of 50%), while silver took a little longer to peak to $49 the following April ( a massive gain of around three times that of gold) before silver was dramatically taken down – in a similar manner to gold earlier this year.
Butler reckons that it’s not hard to imagine a similar scenario to occur in the near future. Whether though the kinds of extremely rapid rises which led to the gold and silver peaks, and may ultimately have led to their downfall as the huge short position holders with massive financial backing needed to redress the situation, will re-occur, at least in the near future, may be unlikely given how short a time has elapsed since those peaks, but a more gradual, and controlled, rise could well be on the cards.
But – as we noted earlier, everything depends on the movement in the gold price. If the big price takedowns by the big money are now over, then gold should rise regardless of Fed tapering.
The global economy remains in a mess while the Detroit bankruptcy, which could be followed by a whole spate of other mega municipalities in a similar situation, will surely bring home to the U.S. public that things are not quite as rosy as the politicians and economists try to make out.
The Eurozone has other shocks to come on the world stage. Gold supposedly thrives on uncertainty. At some stage it will turn upwards and when it does silver will too – but faster.
http://www.mineweb.com/mineweb/content/en/mineweb-whats-new?oid=198532&sn=Detail
Riverside Resources Signs US$1,800,000 Three Year Strategic Alliance With Antofagasta for Copper Exploration in Eastern Sonora, Mexico
VANCOUVER, BRITISH COLUMBIA--(Marketwired - Jul 22, 2013) - Riverside Resources Inc. ("Riverside" or the "Company") (TSX VENTURE:RRI)(RVSDF)(R99.F) is pleased to announce the signing of a three year, US$1.8M strategic exploration alliance (the "Alliance") with a wholly-owned subsidiary of Antofagasta Plc ("Antofagasta") for generative exploration in the major copper belt of northwestern Mexico in the eastern part of the state of Sonora. The Alliance will focus on finding and developing new large copper deposits using Riverside's extensive technical knowledge of copper systems and strong generative exploration team strategically based in Hermosillo, Sonora, Mexico.
Antofagasta will fund US$600,000 on an annual basis for three (3) years of generative grass-roots exploration within a defined exploration area covering eastern Sonora and parts of western Chihuahua and northern Sinaloa. The exploration area being explored by Antofagasta and Riverside is a continuation of the same belt that hosts more than 25 known deposits and mines north of the border in Arizona, and is also host to one of the world's top 10 (and lowest cash cost) copper producers in Grupo Mexico.(1) Properties that are identified and deemed to be of interest will become Designated Properties whereby Antofagasta will have the opportunity to earn a 65% interest by completing a four year, US$5,000,000 work program. Once earn-in on a Designated Project (DP) is completed, a one-time payment of US$3,000,000 will be made to Riverside and the property will then be advanced under a joint venture agreement (65%-35%).
The Alliance will target properties containing primarily Cu with possible minor amounts of Au, Ag, Mo, Pb, Zn, Ni and PGM. All properties identified by Riverside under the Alliance that are not jointly pursued will then be available for Riverside to pursue on its own should Antofagasta decide it does not fit their strategic interests. All decisions relating to the Alliance will be made jointly by the Technical Committee with Antofagasta holding a tie-breaking vote while sole funding. Unless otherwise specified, Riverside will be the designated operator for all exploration activities of the Alliance. All property acquisitions will be in the name of Riverside's wholly owned subsidiary and transferred to a jointly held company once selected as a DP.
"Riverside and Antofagasta have built a strong relationship during our work together in British Columbia, and we now look forward to applying a similar partnership framework to our joint exploration efforts within the prolific Laramide copper belt of northwestern Mexico, which is the continuation of the many large copper mines in Arizona and extends southward into Sonora where this Alliance will focus."
-John-Mark Staude, President & CEO of Riverside Resources Inc.
Antofagasta and Riverside are already working in a generative grass roots exploration alliance in British Columbia where drilling is again set to commence in the second year of the BC Alliance. The Mexico Alliance with Antofagasta will draw from the vast databases, technical experience and Riverside's exploration team and infrastructure already in place to rapidly deliver potential Designated Properties to Antofagasta for their evaluation for additional funding and advancement. Further details on the Riverside-Antofagasta Mexico Alliance will be available on the Company's website shortly.
Key Designated Project Alliance Terms:
Projects selected as Designated Project's will have deemed ownership of 51% and 49% for Antofagasta and Riverside respectively. Antofagasta would then have to spend a minimum of US$5,000,000 within four (4) years from the date the DP is chosen, with minimum annual expenditures as follows:
(i) US$500,000 on or before the first anniversary of the Effective Date;
(ii) an additional US$700,000 on or before the second anniversary of the Effective Date (for a cumulative amount of US$1,200,000);
(iii) an additional $1,500,000 on or before the third anniversary of the Effective Date (for a cumulative amount of US$2,700,000); and
(iv) an additional US$2,300,000 on or before the fourth anniversary of the Effective Date (for a cumulative amount of US$5,000,000); and
Once Antofagasta has completed the earn-in requirements, Riverside would be entitled to receive a Success Fee of US$3,000,000 from Antofagasta within 90 days. The Designated Project would then be advanced with Antofagasta and Riverside holding 65% and 35% interest respectively. If Riverside's interest in a Designated Project is ever reduced to 10% or less this interest will be converted to a 2% NSR.
About Riverside Resources Inc.:
Riverside is a well-funded prospect generation team of focused, proactive gold discoverers with the breadth of knowledge to dig much deeper. The Company currently has approximately $6,000,000 in the treasury and 37,000,000 shares outstanding. The Company's model of growth through partnerships and exploration looks to use the prospect generation business approach to own resources, while partners share in de-risking projects on route to discovery. Riverside has additional properties available for option with more information available on the Company's website at www.rivres.com.
About Antofagasta:
Antofagasta plc is a Chile-based copper mining group with interests in energy, transport and water distribution. It is listed on the London Stock Exchange and is a constituent of the FTSE 100 index. Antofagasta's mining activities are primarily concentrated in Chile where it owns and operates four copper mines, which in 2012 produced 709,600 tonnes of copper, 12,200 tonnes of molybdenum and 299,900 ounces of gold. Antofagasta also has mining exploration, evaluation and/or feasibility programs in North America, Latin America, Europe, Asia, Australia, and Africa.
ON BEHALF OF RIVERSIDE RESOURCES INC.
Dr. John-Mark Staude, President & CEO
Certain statements in this press release may be considered forward-looking information. These statements can be identified by the use of forward looking terminology (e.g., "expect"," estimates", "intends", "anticipates", "believes", "plans"). Such information involves known and unknown risks -- including the availability of funds, the results of financing and exploration activities, the interpretation of exploration results and other geological data, or unanticipated costs and expenses and other risks identified by Riverside in its public securities filings that may cause actual events to differ materially from current expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release.
(
1) (Basov, 2013)
Contact:
Riverside Resources Inc.
John-Mark Staude
President & CEO
(778) 327-6671
(778) 327-6675
info@rivres.com
www.rivres.com
Riverside Resources Inc.
Joness Lang
Manager, Corporate Development
(800) RIV-RES1
(778) 327-6675
jlang@rivres.com
www.rivres.com
http://finance.yahoo.com/news/riverside-resources-signs-us-1-130000317.html
Ahead Of Tomorrow's Hearing On Goldman And JPM's Commodity Cartel
Submitted by Tyler Durden on 07/22/2013
Back in June 2011 we first reported how "Goldman, JP Morgan Have Now Become A Commodity Cartel As They Slowly Recreate De Beers' Diamond Monopoly" in an article that explained, with great detail, how Goldman et al engage in artificial commodity traffic bottlenecking (thanks to owning all the key choke points in the commodity logistics chain) in order to generate higher end prices, rental income and numerous additional top and bottom-line externalities and have become the defacto commodity warehouse monopolists. Specifically, we compared this activity to similar cartelling practices used by other vertically integrated commodity cartels such as De Beers: "While the obvious purpose of "warehousing" is nothing short of artificially bottlenecking primary supply, these same warehouses have no problem with acquiring all the product created by primary producers in real time, and not releasing it into general circulation: once again, a tactic used by De Beers for decades to keep the price of diamonds artificially high."
Over the weekend, with a 25 month delay, the NYT "discovered" just this, reporting that the abovementioned practice was nothing but "pure gold" to the banks. It sure is, and will continue to be. And while we are happy that the mainstream media finally woke up to this practice which had been known to our readers for over two years, the question is why now? The answer is simple - tomorrow, July 23, the Senate Committee on Banking will hold a hearing titled "[colorblue]Should Banks Control Power Plants, Warehouses, And Oil Refiners[/color]."
While congratulations are also due to the Senate for finally waking up to this monopolistic travesty conducted by the big banks, we can only assume that this is due to various key non-bank industry participants (such as MillerCoors) crying foul so much that even the Fed is now involved and is supposedly reviewing its own decision from 2003 that allowed this activity in the first place.
Bloomberg explains:
When the Federal Reserve gave JPMorgan (JPM) Chase & Co. approval in 2005 for hands-on involvement in commodity markets, it prohibited the bank from expanding into the storage business because of the risk. Five years later, JPMorgan bought one of the world’s biggest metal warehouse companies.
While the Fed has never explained why it let that happen, the central bank announced July 19 that it’s reviewing a 2003 precedent that let deposit-taking banks trade physical commodities. Reversing that policy would mark the Fed’s biggest ejection of banks from a market since Congress lifted the Depression-era law against them running securities firms in 1999.
“The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” said Barbara Hagenbaugh, a Fed spokeswoman. She declined to elaborate.
“When Wall Street banks control the supply of both commodities and financial products, there’s a potential for anti-competitive behavior and manipulation,” Brown said in an e-mailed statement. Goldman Sachs, Morgan Stanley and JPMorgan are the biggest Wall Street players in physical commodities.
Of course, when one is a monopoly, the revenues follow easily. The trick, of course, is to keep Congress very much unaware of said monopoly and let the good times roll.
The 10 largest banks generated about $6 billion in revenue from commodities, including dealings in physical materials as well as related financial products, according to a Feb. 15 report from analytics company Coalition. Goldman Sachs ranked No. 1, followed by JPMorgan.
While banks generally don’t specify their earnings from physical materials, Goldman Sachs wrote in a quarterly financial report that it held $7.7 billion of commodities at fair value as of March 31. Morgan Stanley had $6.7 billion.
On June 27, four Democratic members of Congress wrote a letter asking Fed Chairman Ben S. Bernanke, among other things, how Fed examiners would account for possible bank runs caused by a bank-owned tanker spilling oil, and how the Fed would resolve a systemically important financial institution’s commodities activities if it were to collapse.
Just because questions like these finally had to be asked, one has to laugh. One person not laughing, tough, is Ben Bernanke - the man whose Fed allowed bank commodity cartellization to take place originally. He is certainly not laughing now that he may be forced to undo this permission, in the process impairing banks to the tune of billions in revenue: as a reminder, the Fed works purely to benefit America's banks and to provide them with whatever top-line amenities they need and are confident they can pass by under the noses of dumb congressmen. But at least the Fed promises it can "supervise" all these TBTF banks. Or can it?
Now, “it is virtually impossible to glean even a broad overall picture of Goldman Sachs’s, Morgan Stanley’s, or JPMorgan’s physical commodities and energy activities from their public filings with the Securities and Exchange Commission and federal bank regulators,” Saule T. Omarova, a University of North Carolina-Chapel Hill law professor, wrote in a November 2012 academic paper, “Merchants of Wall Street: Banking, Commerce and Commodities.”
The added complexity makes the financial system less stable and more difficult to supervise, she said in an interview.
“It stretches regulatory capacity beyond its limits,” said Omarova, who is slated to be a witness at the Senate hearing. “No regulator in the financial world can realistically, effectively manage all the risks of an enterprise of financial activities, but also the marketing of gas, oil, electricity and metals. How can one banking regulator develop the expertise to know what’s going on?”
Now that the entire world is looking, and not just a select subset of Zero Hedge readers, the full extend of Goldman's monopoly becomes apparent:
Goldman Sachs owns coal mines in Colombia, a stake in the railroad that transports the coal to port, part of an oil field off the coast of Angola and one of the largest metals warehouse networks in the world, among other investments. Morgan Stanley’s involvement includes Denver-based TransMontaigne Inc. (TLP), a petroleum and chemical transportation and storage company, and Heidmar Inc., based in Norwalk, Connecticut, which manages more than 100 oil tankers, according to its website.
Mark Lake, a spokesman for New York-based Morgan Stanley, referred to company regulatory filings that said the bank didn’t expect to have to divest any of its activities after the grace period ends. He declined to elaborate or to comment on the Fed’s announced rule review.
Brian Marchiony, a spokesman for JPMorgan, also declined to comment on the review, as did Michael DuVally, a Goldman Sachs spokesman.
...
In February 2010, Goldman Sachs bought Romulus, Michigan-based Metro International Trade Services LLC, which as of July 11 operates 34 out of 39 storage facilities licensed by the London Metal Exchange in the Detroit area, according to LME data. Since then, aluminum stockpiles in Detroit-area warehouses surged 66 percent and now account for 80 percent of U.S. aluminum inventory monitored by the LME and 27 percent of total LME aluminum stockpiles, exchange data from July 18 show.
Traders employed by the bank can steer metal owned by others into Metro facilities, creating a stockpile, said Robert Bernstein, an attorney with Eaton & Van Winkle LLC in New York. He represents consumers who have complained to the LME about what they call artificial shortages of the metal.
“ The warehouse companies, which store both LME and non-LME metals, do not own metal in their facilities, but merely store it on behalf of the ultimate owners,” said DuVally, the Goldman Sachs spokesman. “In fact, LME warehouses are actually prohibited from trading all LME products.”
Right - Goldman is doing humanity a favor and what not, just like when it was shorting RMBS, when Goldman was merely "making markets." Or unmarkets as the case may be. In the meantime, aluminum prices are surging, as we said would happen back in June 2011:
Buyers have to pay premiums over the LME benchmark prices even with a glut of aluminum being produced. Premiums in the U.S. surged to a record 12 cents to 13 cents a pound in June, almost doubling from 6.5 cents in summer 2010, according to the most recent data available from Austin, Texas-based researcher Harbor Intelligence.
Warehouses are creating logjams, said Chris Thorne, a Beer Institute spokesman.
Naturally, the Vampire Squid is not alone: JPM, whose commodity group is headed by Blythe Masters currently under investigation by FERC with a slap on the wrist settlement pending, is most certainly involved as well.
JPMorgan, the biggest U.S. bank, inherited electricity sales arrangements in California and the Midwestern U.S. in 2008 when it bought failing investment bank Bear Stearns Cos. Its February 2010 purchase of RBS Sempra Commodities LLP’s worldwide oil and metal investments and European power and gas assets was also a distressed transaction. The European Union ordered Royal Bank of Scotland Group Plc to sell its controlling stake in the firm after a taxpayer bailout.
In short: just like the repeal of Glass Steagall allowed banks to mix deposit collecting and risk-taking divisions, so the Fed's landmark 2003 decision allowed banks to commingle financial and physical commodities. And while the US government, and broader public, seem largely ignorant and without a care if they end up overpaying billions more to Goldman's and JPM's employees, one country where commodities are exceptionally fragmented in their use as both a financial (i.e. paper) and physical commodity is China - maybe if the Fed will not move, then it will be up to China to punish the three firms which are set to unleash the same scheme described above with copper as they have with aluminum. Because one (or three in this case: Goldman, JPM and BlackRock) doesn't amass 80% of the world's copper "on behalf of investors" for non-profit reasons.
While we don't expect anything new to develop here, nor anywhere else, until the entire system comes crashing down and forces a fundamental overhaul of modern finance at the grassroots level, tomorrow's hearing will be webcast live on Zero Hedge and will have the following witnesses.
Ms. Saule Omarova
Associate Professor of Law
University of North Carolina at Chapel Hill School of Law
Mr. Joshua Rosner
Managing Director
Graham Fisher & Company
Mr. Timothy Weiner
Global Risk Manager
Commodities/Metals, MillerCoors LLC
Mr. Randall D. Guynn
Head of Financial Institutions Group
We look forward to seeing how the Chairman, or his successor, will deflect this one.
http://www.zerohedge.com/news/2013-07-22/ahead-tomorrows-hearing-goldman-and-jpms-commodity-ca
Ahead Of Tomorrow's Hearing On Goldman And JPM's Commodity Cartel
Submitted by Tyler Durden on 07/22/2013
Back in June 2011 we first reported how "Goldman, JP Morgan Have Now Become A Commodity Cartel As They Slowly Recreate De Beers' Diamond Monopoly" in an article that explained, with great detail, how Goldman et al engage in artificial commodity traffic bottlenecking (thanks to owning all the key choke points in the commodity logistics chain) in order to generate higher end prices, rental income and numerous additional top and bottom-line externalities and have become the defacto commodity warehouse monopolists. Specifically, we compared this activity to similar cartelling practices used by other vertically integrated commodity cartels such as De Beers: "While the obvious purpose of "warehousing" is nothing short of artificially bottlenecking primary supply, these same warehouses have no problem with acquiring all the product created by primary producers in real time, and not releasing it into general circulation: once again, a tactic used by De Beers for decades to keep the price of diamonds artificially high."
Over the weekend, with a 25 month delay, the NYT "discovered" just this, reporting that the abovementioned practice was nothing but "pure gold" to the banks. It sure is, and will continue to be. And while we are happy that the mainstream media finally woke up to this practice which had been known to our readers for over two years, the question is why now? The answer is simple - tomorrow, July 23, the Senate Committee on Banking will hold a hearing titled "[colorblue]Should Banks Control Power Plants, Warehouses, And Oil Refiners[/color]."
While congratulations are also due to the Senate for finally waking up to this monopolistic travesty conducted by the big banks, we can only assume that this is due to various key non-bank industry participants (such as MillerCoors) crying foul so much that even the Fed is now involved and is supposedly reviewing its own decision from 2003 that allowed this activity in the first place.
Bloomberg explains:
When the Federal Reserve gave JPMorgan (JPM) Chase & Co. approval in 2005 for hands-on involvement in commodity markets, it prohibited the bank from expanding into the storage business because of the risk. Five years later, JPMorgan bought one of the world’s biggest metal warehouse companies.
While the Fed has never explained why it let that happen, the central bank announced July 19 that it’s reviewing a 2003 precedent that let deposit-taking banks trade physical commodities. Reversing that policy would mark the Fed’s biggest ejection of banks from a market since Congress lifted the Depression-era law against them running securities firms in 1999.
“The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” said Barbara Hagenbaugh, a Fed spokeswoman. She declined to elaborate.
“When Wall Street banks control the supply of both commodities and financial products, there’s a potential for anti-competitive behavior and manipulation,” Brown said in an e-mailed statement. Goldman Sachs, Morgan Stanley and JPMorgan are the biggest Wall Street players in physical commodities.
Of course, when one is a monopoly, the revenues follow easily. The trick, of course, is to keep Congress very much unaware of said monopoly and let the good times roll.
The 10 largest banks generated about $6 billion in revenue from commodities, including dealings in physical materials as well as related financial products, according to a Feb. 15 report from analytics company Coalition. Goldman Sachs ranked No. 1, followed by JPMorgan.
While banks generally don’t specify their earnings from physical materials, Goldman Sachs wrote in a quarterly financial report that it held $7.7 billion of commodities at fair value as of March 31. Morgan Stanley had $6.7 billion.
On June 27, four Democratic members of Congress wrote a letter asking Fed Chairman Ben S. Bernanke, among other things, how Fed examiners would account for possible bank runs caused by a bank-owned tanker spilling oil, and how the Fed would resolve a systemically important financial institution’s commodities activities if it were to collapse.
Just because questions like these finally had to be asked, one has to laugh. One person not laughing, tough, is Ben Bernanke - the man whose Fed allowed bank commodity cartellization to take place originally. He is certainly not laughing now that he may be forced to undo this permission, in the process impairing banks to the tune of billions in revenue: as a reminder, the Fed works purely to benefit America's banks and to provide them with whatever top-line amenities they need and are confident they can pass by under the noses of dumb congressmen. But at least the Fed promises it can "supervise" all these TBTF banks. Or can it?
Now, “it is virtually impossible to glean even a broad overall picture of Goldman Sachs’s, Morgan Stanley’s, or JPMorgan’s physical commodities and energy activities from their public filings with the Securities and Exchange Commission and federal bank regulators,” Saule T. Omarova, a University of North Carolina-Chapel Hill law professor, wrote in a November 2012 academic paper, “Merchants of Wall Street: Banking, Commerce and Commodities.”
The added complexity makes the financial system less stable and more difficult to supervise, she said in an interview.
“It stretches regulatory capacity beyond its limits,” said Omarova, who is slated to be a witness at the Senate hearing. “No regulator in the financial world can realistically, effectively manage all the risks of an enterprise of financial activities, but also the marketing of gas, oil, electricity and metals. How can one banking regulator develop the expertise to know what’s going on?”
Now that the entire world is looking, and not just a select subset of Zero Hedge readers, the full extend of Goldman's monopoly becomes apparent:
Goldman Sachs owns coal mines in Colombia, a stake in the railroad that transports the coal to port, part of an oil field off the coast of Angola and one of the largest metals warehouse networks in the world, among other investments. Morgan Stanley’s involvement includes Denver-based TransMontaigne Inc. (TLP), a petroleum and chemical transportation and storage company, and Heidmar Inc., based in Norwalk, Connecticut, which manages more than 100 oil tankers, according to its website.
Mark Lake, a spokesman for New York-based Morgan Stanley, referred to company regulatory filings that said the bank didn’t expect to have to divest any of its activities after the grace period ends. He declined to elaborate or to comment on the Fed’s announced rule review.
Brian Marchiony, a spokesman for JPMorgan, also declined to comment on the review, as did Michael DuVally, a Goldman Sachs spokesman.
...
In February 2010, Goldman Sachs bought Romulus, Michigan-based Metro International Trade Services LLC, which as of July 11 operates 34 out of 39 storage facilities licensed by the London Metal Exchange in the Detroit area, according to LME data. Since then, aluminum stockpiles in Detroit-area warehouses surged 66 percent and now account for 80 percent of U.S. aluminum inventory monitored by the LME and 27 percent of total LME aluminum stockpiles, exchange data from July 18 show.
Traders employed by the bank can steer metal owned by others into Metro facilities, creating a stockpile, said Robert Bernstein, an attorney with Eaton & Van Winkle LLC in New York. He represents consumers who have complained to the LME about what they call artificial shortages of the metal.
“The warehouse companies, which store both LME and non-LME metals, do not own metal in their facilities, but merely store it on behalf of the ultimate owners,” said DuVally, the Goldman Sachs spokesman. “In fact, LME warehouses are actually prohibited from trading all LME products.”
Right - Goldman is doing humanity a favor and what not, just like when it was shorting RMBS, when Goldman was merely "making markets." Or unmarkets as the case may be. In the meantime, aluminum prices are surging, as we said would happen back in June 2011:
Buyers have to pay premiums over the LME benchmark prices even with a glut of aluminum being produced. Premiums in the U.S. surged to a record 12 cents to 13 cents a pound in June, almost doubling from 6.5 cents in summer 2010, according to the most recent data available from Austin, Texas-based researcher Harbor Intelligence.
Warehouses are creating logjams, said Chris Thorne, a Beer Institute spokesman.
Naturally, the Vampire Squid is not alone: JPM, whose commodity group is headed by Blythe Masters currently under investigation by FERC with a slap on the wrist settlement pending, is most certainly involved as well.
JPMorgan, the biggest U.S. bank, inherited electricity sales arrangements in California and the Midwestern U.S. in 2008 when it bought failing investment bank Bear Stearns Cos. Its February 2010 purchase of RBS Sempra Commodities LLP’s worldwide oil and metal investments and European power and gas assets was also a distressed transaction. The European Union ordered Royal Bank of Scotland Group Plc to sell its controlling stake in the firm after a taxpayer bailout.
In short: just like the repeal of Glass Steagall allowed banks to mix deposit collecting and risk-taking divisions, so the Fed's landmark 2003 decision allowed banks to commingle financial and physical commodities. And while the US government, and broader public, seem largely ignorant and without a care if they end up overpaying billions more to Goldman's and JPM's employees, one country where commodities are exceptionally fragmented in their use as both a financial (i.e. paper) and physical commodity is China - maybe if the Fed will not move, then it will be up to China to punish the three firms which are set to unleash the same scheme described above with copper as they have with aluminum. Because one (or three in this case: Goldman, JPM and BlackRock) doesn't amass 80% of the world's copper "on behalf of investors" for non-profit reasons.
While we don't expect anything new to develop here, nor anywhere else, until the entire system comes crashing down and forces a fundamental overhaul of modern finance at the grassroots level, tomorrow's hearing will be webcast live on Zero Hedge and will have the following witnesses.
Ms. Saule Omarova
Associate Professor of Law
University of North Carolina at Chapel Hill School of Law
Mr. Joshua Rosner
Managing Director
Graham Fisher & Company
Mr. Timothy Weiner
Global Risk Manager
Commodities/Metals, MillerCoors LLC
Mr. Randall D. Guynn
Head of Financial Institutions Group
We look forward to seeing how the Chairman, or his successor, will deflect this one.
http://www.zerohedge.com/news/2013-07-22/ahead-tomorrows-hearing-goldman-and-jpms-commodity-cartel
China Maneuvers To Take Away US' Dominant Reserve Currency Status
Submitted by ilene on
07/22/2013
ZeroHedge
CHINA MANEUVERS TO TAKE AWAY US’ DOMINANT RESERVE CURRENCY STATUS
by RUSS WINTER
“All warfare is based on deception.” – Sun Tzu, “The Art of War” (500 B.C.)
“The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, to be the rightful and anointed convertible currency of the world.” – Thailand Deputy Prime Minister Olarn Chaipravat in an interview with Bloomberg
“An international monetary system dominated by a single sovereign sovereign currency has intensified the concentration of risk and the spread of the crisis.” — People’s Bank of China (2009)
It should go without saying that China and Russia have designs to end the U.S. Dollar hegemony free ride. This is fundamental to understand and will be a game changer. The impacts on the standard of living of these players will be profound and especially negative for the U.S. How and in what manner this plays out is the question. I strongly believe that the answer lies in two parts: letting the U.S. put a noose around its own neck and then at the appropriate time, kicking the chair out from under it.
The first part of the operation is now advanced and is described below. The second part involves China and Russia preparing its relative currencies to be accepted in lieu of dollars. It means making the yuan and ruble at least equal to, if not superior to, American dollars in world trade. As you can imagine, the U.S. — a country with a debt-to-GDP ratio approaching 110% — can ill afford this sort of challenge to its status as a reserve currency.
China has already advanced the Yuan as a principal exchange currency by incorporating a series of deal with other countries. Such arrangements are hardly mentioned by U.S. financial media, but they are going on constantly. So far, the People’s Bank of China (PBOC) has signed nearly 2 trillion yuan worth of currency-swap deals with 20 countries and regions, including Hong Kong. Here’s a breakdown of happenings:
* Earlier this month, the European Central Bank announced a large currency swap arrangement with China.
* An Asian ”renminbi bloc” has been formed involving seven countries.
* Russia, Iran, Angola, Sudan and Venezuela have converted oil sales to China into the Chinese Yuan. Worldwide, we see more than 5 million barrels per day traded in Yuan rather than U.S. dollars.
* Thechinamoneyreport.com on June 16 reported RMB-yen trade is growing strongly a year after launch.
* BBC News, April 9: “China and Australia in Currency Pact“
* BBC News, Feb. 22: “UK and China Poised for Currency Swap Deal“
* BBC News, March 26: “China and Brazil Sign $30bn Currency Swap Arrangement“
* Thechinamoneyreport.com on June 4 reports that Singapore has launched a Yuan clearing service.
Although ignored in the U.S., there has been increased chatter among foreign media about the RMB (aka Yuan) reaching safe-haven, reserve currency status, as Asia Today reported on July 22.
I suggest that the kicking the chair out from USD hegemony involves at least partially backing the Yuan, and Ruble for that matter, with gold. China’s reserve assets were 30.2% of the world total at the end of last year. How much of this is already in gold?
China is secretive about the number, I think it’s because it had some catching up to do and it’s incorporating Sun Tzu-style principles, namely deception. The last time China revealed its gold reserve levels was in 2009 at 1,054 tonnes, which caught the market by surprise.
Another reference point is that China’s foreign exchange reserve increased from $2.2 trillion in 2009 to $3.4 trillion today. During that period, U.S. dollar reserves held by China fell from 69% to 54%. If only 10% of that $1.2 trillion increase went to gold, then let’s see … At an average price of $1,200, that would be nearly 3,000 tonnes, bringing China’s total gold holdings up to 4000 tonnes. Conventional wisdom would point to between 3,000 and 4,000 tonnes. The U.S. supposedly has 8,133 tonnes in its reserves. Russia has doubled its gold reserve in four years.
China’s mines produce an average of 350 tonnes per year. During the last four years, it has produced 1,400 tonnes. Certainly, its domestic production went toward its reserve. Production estimates for 2013 are 440 tonnes. It should be noted, however, that from 2002 to 2009 China had produced approximately 1800 metric tonnes of gold, which strongly suggests that its figure of 1,054 tonnes for 2009 is understated and deceptive, maybe by a factor of two to three times.
Between 2011 and 2012, imports into China via Hong Kong surged to a total of 950 tonnes. Some, but possibly the majority of this ended up in gold reserves. Furthermore, no one talks about “illegal” gold imports smuggled into China, which may add to the total.
This year, the gold grab has reached entirely new levels, no doubt just one of the “unintended consequences” of the gold short attack in the paper “market.” In the first five months of this year, China imported more than what it did for all of 2011, or 525 tonnes.
Another incredible number is the volume of ounces transferred out of the London bullion market (LBMA) in May. That month alone it increased to 28.2 million ounces. To put that in perspective: 28.2 million troy ounces translates into 877 metric tonnes of gold. The amount of physical gold delivered year to date on the Shanghai Gold Exchange is 1,198 tonnes. Again, it’s much more than one would expect of the appetite of institutions, banks and individuals. The “Chinese granny” investor story is overplayed and may be a bit of a decoy. Much of this are PBoC and their proxies.
In 2009, a Chinese state council adviser known simply as “Ji” said that a team of experts from Shanghai and Beijing had set up a task force to consider expanding China’s gold reserves. Ji was quoted as saying, “We suggested that China’s gold reserves should reach 6,000 tons in the next three to five years and perhaps 10,000 tons in eight to 10 years.”
The numbers I’ve cited are consistent with China easily reaching the Ji gold holding of 6,000 tonnes this year. The kind of withdrawal numbers being reported out of the LBMA, Comex and GLD (418 tonnes YTD) suggest that the PBOC through it’s proxy, the State Administration of Foreign Exchange (SAFE), is involved in a physical gold raid of such magnitude that the 6,000-tonne target has been left in the dust. The great gold sale has facilitated a push heading closer to 10,000 tonnes.
More importantly, as long as gold prices remain suppressed, China will continue to be a large-scale buyer. Perversely, if gold prices remain low, it will serve to accelerate the timeline for China to take down USD reserve currency hegemony. The U.S. can ill afford a China gold reserve buildup of 1,000 tonnes or more a year, let alone raid 2,000 tonnes and at cheap prices.
Meanwhile, China reportedly is progressing well on its ambitious plan to recast large gold bars into smaller, 1-kilogram bars on a massive scale. The big gold recast project points to the Chinese preparing for a new system of trade settlement. In the process, they are constructing a foundation for a new gold-supported monetary system that will give them advantages to their trade payments.
Finally, higher gold prices are necessary if the U.S. wants to curb China demand and prevent an emperor-wears-no-clothes scenario on the home front. You see, once yuan becomes a currency fully backed by gold, the next logical step will be not just domestic but international pressure on the U.S. and others, like Germany, to lift the iron curtain and reveal whether the gold they claim backs their currency really exists. Then get ready for all hell to break loose.
http://www.zerohedge.com/contributed/2013-07-22/china-maneuvers-take-away-us%E2%80%99-dominant-reserve-currency-status
Insight: Wall Street reshapes commodities business to fend off regulation
By David Sheppard
NEW YORK | Mon Jul 22, 2013 8:12am EDT
Reuters
(Reuters) - Wall Street's most powerful banks have accelerated efforts to transform the structure and focus of their commodity trading desks to preserve their multibillion-dollar empires from tightening regulation.
Scrutiny of their activities in electricity markets, metals warehousing and oil trading is reaching fever pitch ahead of a Federal Reserve decision in September that may decide how deeply banks can delve into the world of gasoline tankers, piles of copper and power plants.
Mounting regulatory and political pressure has already forced Morgan Stanley, Goldman Sachs Group Inc, and JPMorgan Chase & Co, the three Wall Street banks known for their commodities trading prowess in the past decade, to openly consider exiting key businesses.
Morgan Stanley explored selling its vaunted commodities trading desk last year; Goldman Sachs has already sold off its power plant division, and both Goldman and JPMorgan Chase are now considering a sale of their metal warehousing firms, sources said.
Wall Street firms have also adopted more subtle maneuvers, reconfiguring operations to placate regulators, expanding into new markets, and trying to find ways to preserve the value of their investments if they are forced to sell or spin them off, according to a Reuters review of regulatory filings and more than a dozen interviews with top traders and bankers.
The three banks declined to comment on their plans for this article.
Among the maneuvers that have not been reported previously: JPMorgan reshuffled the board of its Henry Bath metals warehousing company last year in an attempt to qualify it as a "merchant banking" investment, sources say.
That designation could allow it to keep the assets for up to 10 years if it cannot find a buyer, although it is unclear whether that effort has been persuasive with regulators.
Goldman Sachs has pressed, so far without success, to get the green light from regulators to move into the growing physical iron ore business, sources familiar with the talks say.
Morgan Stanley, which has the biggest presence of any bank in physical commodity markets, last week tied itself even more closely to its vast logistics subsidiary, TransMontaigne, extending the majority of its oil terminal leases with the firm indefinitely, according to a filing.
Brad Hintz, a Wall Street analyst at Sanford Bernstein & Co in New York and a former treasurer of Morgan Stanley, said Wall Street was seeking ways to preserve its commodities business role.
"The banks have essentially been told by the Federal Reserve they're allowed a certain number of sins," Hintz said. "Just not as many as there used to be."
At the same time, various investigations - ranging from probes of alleged U.S. electricity price manipulation to aluminum hoarding - have led to more political scrutiny of the banks' commodities dealings than at any time since 2008. In that year, Wall Street faced accusations of helping to stoke oil prices to a record peak of almost $150 a barrel in the lead up to the financial crisis.
On Tuesday, the Senate banking committee holds its first hearing on Wall Street's role in the trillion-dollar physical market for oil and other commodities. It is responding to complaints from aluminum consumers such as brewer MillerCoors that say banks are boosting prices through their control of international metals warehouses.
The U.S. Commodity Futures Trading Commission last week put all the major warehouse operators on notice of a possible probe, Reuters reported on Sunday.
And on Friday the Fed shocked the industry by saying it was reconsidering its decade-old decision that first allowed banks to participate in physical commodity markets, threatening an even deeper blow to Wall Street than had been anticipated.
The short statement marked the Fed's first comments on an issue that had been largely hidden from public view until a Reuters report last year. (Full story: link.reuters.com/xer86s).
"It's not clear yet how far the (Fed) review is going to go," said Saule Omarova, associate professor of law at the University of North Carolina at Chapel Hill School of Law, who will appear at the Senate banking committee hearing.
"Are they going to change what they're authorized to do, or will they say the decision to let bank holding companies start trading in physical commodities 10 years ago was the correct one?" Omarovo said.
The Fed declined to discuss specific companies or the likely final outcome of the review. Spokespeople for Morgan Stanley, Goldman Sachs and JPMorgan declined to comment.
PREPARING FOR THE WORST
For much of the past five years, Goldman, Morgan Stanley and JPMorgan quietly hoped to persuade the Federal Reserve to let them keep owning power plants, storage facilities and other trading assets before a five-year grace period expires in September, according to interviews with people familiar with the businesses.
Morgan Stanley and Goldman Sachs had became known as the 'Wall Street refiners' after they grew out of the New York and Chicago trading pits to become full-scale merchant commodity houses, owning fleets of oil tankers, buying up refineries, and even operating regional electricity plants.
At their peak between 2007 and 2009, commodities trading accounted for as much as a fifth of their overall annual revenues, at times touching as much as $8 billion between them.
But since converting to bank holding companies in 2008, to get access to emergency Fed funding, they have faced a host of new regulations that have cut into their profits.
While other commercial banks have long been barred from owning such assets, Goldman and Morgan Stanley have argued that their commodities activities were "grandfathered" under a 1999 law, citing an amendment allowing non-regulated banks to carry on activities they engaged in prior to 1997.
While the Federal Reserve has not made a final decision, the banks are preparing increasingly for the worst as the Fed itself comes under pressure to explain why it allows any so-called "Too Big to Fail" bank to participate in risky commercial markets.
Four Democratic congressmen wrote to Fed Chairman Ben Bernanke on June 27 expressing their concern about banks exposing their balance sheets to the risks of disasters such as power plant explosions or oil spills.
GOLDMAN GETS LESS PHYSICAL
Goldman Sachs, once the most powerful financial commodity trader on Wall Street, has said it has no plans to sell or scale back its commodities business. CEO Lloyd Blankfein and COO Gary Cohn both have close ties to the business given they started at the bank's J. Aron commodities arm.
"We got into that business in 1981 and have invested a huge amount in being a market leader," Goldman CFO Harvey Schwartz said in April. "We are very committed to that business."
But in the past three years Goldman's revenues from commodities have suffered, and were down 90 percent last year compared with the peak in 2009.
The bank has sold its power plant development group, Cogentrix, to private equity firm Carlyle Group, sharply reducing its physical footprint in electricity markets, and has explored a possible sale of its Metro International metals warehousing business.
If Metro is sold, the bank that was once a powerhouse in the physical markets will have disposed of much of its physical trading assets.
In newer markets where a physical presence is critical, such as iron ore, the bank has so far been rebuffed by regulators.
MORGAN STANLEY TANKS AND TERMINALS
In April, Morgan Stanley CEO James Gorman told investors that he believed the banks already faced more restrictions in commodities than ever before. Once a major profit engine for the bank, commodity revenue fell 77 percent in the first quarter, according to filings with the Securities and Exchange Commission.
"The ability to continue to acquire real assets and trade around those real assets is restricted for us and for the industry," Gorman said in a presentation laying out the future of the bank's fixed income, currencies and commodities business.
The bank's oil business continued to falter between April and June, Chief Financial Officer Ruth Porat told analysts last week.
Despite the uncertainty hanging over its commodities unit, Morgan Stanley is pushing ahead with one of its biggest physical asset investments ever, a 42.5 percent stake in a $485 million oil terminal near Houston being built by its logistics subsidiary TransMontaigne Inc.
The unit, ranked by Forbes magazine as the 17th largest private company in the United States, with revenues of more than $14 billion last year, is a cornerstone of Morgan Stanley's oil division, providing storage and transportation for millions of barrels of crude, gasoline and diesel shipped by the bank's traders.
JPMORGAN TWISTS AND TWEAKS
JPMorgan's position in this debate is different: As a commercial bank, it had always been subject to the Fed's rules, but in 2008 inherited power plants from the takeover of Bear Stearns, and absorbed the Henry Bath warehouses in the 2010 purchase of Sempra Commodities.
The long-term status of those assets has remained unclear, as the Fed normally gives banks three years to comply with regulations. For Henry Bath, one of the world's biggest metal storage firms, the deadline expired on July 1.
But JPMorgan has argued that the operations are still allowed under rules governing merchant banking investments, which are allowed by the Fed so long as the assets are held at arm's length from the bank and are sold within 10 years.
While those familiar with the business say it is operated as an asset separate from the bank's metals trading team, in keeping with the guidelines of the London Metal Exchange (LME), it is not clear who now ultimately controls the franchise.
Last year, JPMorgan added commodity chief Blythe Masters and other JPMorgan executives to Henry Bath's board, according to filings with Britain's Companies House.
It is unclear whether the metals warehouses are the money-spinners they once were. Profits at Henry Bath fell to $28 million 2011, a quarter of what they were in 2009, according to Companies House filings. Results for last year have not yet been filed.
JPMorgan Chief Executive Jamie Dimon is under intensifying pressure over the bank's role in energy markets. JPMorgan is negotiating a potential $410 million settlement with federal regulators over allegations it used power plants in California and Michigan to manipulate markets, according to media reports last week.
In May the bank sold three power marketing agreements in California.
(Additional reporting by Josephine Mason and Jonathan Leff; Editing by Martin Howell and Anthony Barker)
http://www.reuters.com/article/2013/07/22/us-commodities-banks-insight-idUSBRE96L0BY20130722
Insight: Wall Street reshapes commodities business to fend off regulation
By David Sheppard
NEW YORK | Mon Jul 22, 2013 8:12am EDT
Reuters
(Reuters) - Wall Street's most powerful banks have accelerated efforts to transform the structure and focus of their commodity trading desks to preserve their multibillion-dollar empires from tightening regulation.
Scrutiny of their activities in electricity markets, metals warehousing and oil trading is reaching fever pitch ahead of a Federal Reserve decision in September that may decide how deeply banks can delve into the world of gasoline tankers, piles of copper and power plants.
Mounting regulatory and political pressure has already forced Morgan Stanley, Goldman Sachs Group Inc, and JPMorgan Chase & Co, the three Wall Street banks known for their commodities trading prowess in the past decade, to openly consider exiting key businesses.
Morgan Stanley explored selling its vaunted commodities trading desk last year; Goldman Sachs has already sold off its power plant division, and both Goldman and JPMorgan Chase are now considering a sale of their metal warehousing firms, sources said.
Wall Street firms have also adopted more subtle maneuvers, reconfiguring operations to placate regulators, expanding into new markets, and trying to find ways to preserve the value of their investments if they are forced to sell or spin them off, according to a Reuters review of regulatory filings and more than a dozen interviews with top traders and bankers.
The three banks declined to comment on their plans for this article.
Among the maneuvers that have not been reported previously: JPMorgan reshuffled the board of its Henry Bath metals warehousing company last year in an attempt to qualify it as a "merchant banking" investment, sources say.
That designation could allow it to keep the assets for up to 10 years if it cannot find a buyer, although it is unclear whether that effort has been persuasive with regulators.
Goldman Sachs has pressed, so far without success, to get the green light from regulators to move into the growing physical iron ore business, sources familiar with the talks say.
Morgan Stanley, which has the biggest presence of any bank in physical commodity markets, last week tied itself even more closely to its vast logistics subsidiary, TransMontaigne, extending the majority of its oil terminal leases with the firm indefinitely, according to a filing.
Brad Hintz, a Wall Street analyst at Sanford Bernstein & Co in New York and a former treasurer of Morgan Stanley, said Wall Street was seeking ways to preserve its commodities business role.
"The banks have essentially been told by the Federal Reserve they're allowed a certain number of sins," Hintz said. "Just not as many as there used to be."
At the same time, various investigations - ranging from probes of alleged U.S. electricity price manipulation to aluminum hoarding - have led to more political scrutiny of the banks' commodities dealings than at any time since 2008. In that year, Wall Street faced accusations of helping to stoke oil prices to a record peak of almost $150 a barrel in the lead up to the financial crisis.
On Tuesday, the Senate banking committee holds its first hearing on Wall Street's role in the trillion-dollar physical market for oil and other commodities. It is responding to complaints from aluminum consumers such as brewer MillerCoors that say banks are boosting prices through their control of international metals warehouses.
The U.S. Commodity Futures Trading Commission last week put all the major warehouse operators on notice of a possible probe, Reuters reported on Sunday.
And on Friday the Fed shocked the industry by saying it was reconsidering its decade-old decision that first allowed banks to participate in physical commodity markets, threatening an even deeper blow to Wall Street than had been anticipated.
The short statement marked the Fed's first comments on an issue that had been largely hidden from public view until a Reuters report last year. (Full story: link.reuters.com/xer86s).
"It's not clear yet how far the (Fed) review is going to go," said Saule Omarova, associate professor of law at the University of North Carolina at Chapel Hill School of Law, who will appear at the Senate banking committee hearing.
"Are they going to change what they're authorized to do, or will they say the decision to let bank holding companies start trading in physical commodities 10 years ago was the correct one?" Omarovo said.
The Fed declined to discuss specific companies or the likely final outcome of the review. Spokespeople for Morgan Stanley, Goldman Sachs and JPMorgan declined to comment.
PREPARING FOR THE WORST
For much of the past five years, Goldman, Morgan Stanley and JPMorgan quietly hoped to persuade the Federal Reserve to let them keep owning power plants, storage facilities and other trading assets before a five-year grace period expires in September, according to interviews with people familiar with the businesses.
Morgan Stanley and Goldman Sachs had became known as the 'Wall Street refiners' after they grew out of the New York and Chicago trading pits to become full-scale merchant commodity houses, owning fleets of oil tankers, buying up refineries, and even operating regional electricity plants.
At their peak between 2007 and 2009, commodities trading accounted for as much as a fifth of their overall annual revenues, at times touching as much as $8 billion between them.
But since converting to bank holding companies in 2008, to get access to emergency Fed funding, they have faced a host of new regulations that have cut into their profits.
While other commercial banks have long been barred from owning such assets, Goldman and Morgan Stanley have argued that their commodities activities were "grandfathered" under a 1999 law, citing an amendment allowing non-regulated banks to carry on activities they engaged in prior to 1997.
While the Federal Reserve has not made a final decision, the banks are preparing increasingly for the worst as the Fed itself comes under pressure to explain why it allows any so-called "Too Big to Fail" bank to participate in risky commercial markets.
Four Democratic congressmen wrote to Fed Chairman Ben Bernanke on June 27 expressing their concern about banks exposing their balance sheets to the risks of disasters such as power plant explosions or oil spills.
GOLDMAN GETS LESS PHYSICAL
Goldman Sachs, once the most powerful financial commodity trader on Wall Street, has said it has no plans to sell or scale back its commodities business. CEO Lloyd Blankfein and COO Gary Cohn both have close ties to the business given they started at the bank's J. Aron commodities arm.
"We got into that business in 1981 and have invested a huge amount in being a market leader," Goldman CFO Harvey Schwartz said in April. "We are very committed to that business."
But in the past three years Goldman's revenues from commodities have suffered, and were down 90 percent last year compared with the peak in 2009.
The bank has sold its power plant development group, Cogentrix, to private equity firm Carlyle Group, sharply reducing its physical footprint in electricity markets, and has explored a possible sale of its Metro International metals warehousing business.
If Metro is sold, the bank that was once a powerhouse in the physical markets will have disposed of much of its physical trading assets.
In newer markets where a physical presence is critical, such as iron ore, the bank has so far been rebuffed by regulators.
MORGAN STANLEY TANKS AND TERMINALS
In April, Morgan Stanley CEO James Gorman told investors that he believed the banks already faced more restrictions in commodities than ever before. Once a major profit engine for the bank, commodity revenue fell 77 percent in the first quarter, according to filings with the Securities and Exchange Commission.
"The ability to continue to acquire real assets and trade around those real assets is restricted for us and for the industry," Gorman said in a presentation laying out the future of the bank's fixed income, currencies and commodities business.
The bank's oil business continued to falter between April and June, Chief Financial Officer Ruth Porat told analysts last week.
Despite the uncertainty hanging over its commodities unit, Morgan Stanley is pushing ahead with one of its biggest physical asset investments ever, a 42.5 percent stake in a $485 million oil terminal near Houston being built by its logistics subsidiary TransMontaigne Inc.
The unit, ranked by Forbes magazine as the 17th largest private company in the United States, with revenues of more than $14 billion last year, is a cornerstone of Morgan Stanley's oil division, providing storage and transportation for millions of barrels of crude, gasoline and diesel shipped by the bank's traders.
JPMORGAN TWISTS AND TWEAKS
JPMorgan's position in this debate is different: As a commercial bank, it had always been subject to the Fed's rules, but in 2008 inherited power plants from the takeover of Bear Stearns, and absorbed the Henry Bath warehouses in the 2010 purchase of Sempra Commodities.
The long-term status of those assets has remained unclear, as the Fed normally gives banks three years to comply with regulations. For Henry Bath, one of the world's biggest metal storage firms, the deadline expired on July 1.
But JPMorgan has argued that the operations are still allowed under rules governing merchant banking investments, which are allowed by the Fed so long as the assets are held at arm's length from the bank and are sold within 10 years.
While those familiar with the business say it is operated as an asset separate from the bank's metals trading team, in keeping with the guidelines of the London Metal Exchange (LME), it is not clear who now ultimately controls the franchise.
Last year, JPMorgan added commodity chief Blythe Masters and other JPMorgan executives to Henry Bath's board, according to filings with Britain's Companies House.
It is unclear whether the metals warehouses are the money-spinners they once were. Profits at Henry Bath fell to $28 million 2011, a quarter of what they were in 2009, according to Companies House filings. Results for last year have not yet been filed.
JPMorgan Chief Executive Jamie Dimon is under intensifying pressure over the bank's role in energy markets. JPMorgan is negotiating a potential $410 million settlement with federal regulators over allegations it used power plants in California and Michigan to manipulate markets, according to media reports last week.
In May the bank sold three power marketing agreements in California.
(Additional reporting by Josephine Mason and Jonathan Leff; Editing by Martin Howell and Anthony Barker)
http://www.reuters.com/article/2013/07/22/us-commodities-banks-insight-idUSBRE96L0BY20130722
Gold futures hiccup indicates demand outpacing supply
By Mike Kentz
Fri Jul 19, 2013 3:18pm EDT
Reuters
July 19 (IFR) - A dislocation in the gold futures market indicating that demand for physical delivery of the metal is now far outweighing supply has intensified in recent weeks, increasing concern in the market that the change may not be a momentary blip and participants may have become over-leveraged.
Gold went into backwardation in comparison to the three-month futures contract in early January, meaning the spot price rose above the short-dated future contact. Now that process looks set to creep out the futures curve to longer-dated maturities, signalling some cause for alarm.
"The fact that has remained and widened ... indicates that the physical market has tightened up substantially, a postulation that is corroborated by the growing premiums being paid ... and the ongoing wholesale delays in the delivery of substantial bullion tonnage," wrote Ned Naylor-Leyland of Cheviot Asset Management in a report this month.
"What is happening now is that the absolutely inevitable 'run' on the 100:1 leveraged bullion banking system is truly underway."
Backwardation is a concern in gold markets because in theory demand for physical delivery should never outweigh supply, since the amount of available gold is a known, fixed quantity. The event is not unprecedented, as it also happened during the financial crisis of 2008 - and corrected itself the following year.
The current dislocation indicates that holders of gold futures have begun demanding delivery. But because of the large amount of leverage in the market, participants are not able to deliver on their obligations.
"More and more people want their gold today, at a higher price, no matter that they can buy a future much cheaper," said Guillermo Barba, economist at the New Austrian School of Economics in Mexico.
The high demand lately for spot physical delivery has played a part in the yellow metal's recent rebound from its low of US$1200 per troy ounce at the end of June to US$1283 on July 18. But analysts say it is difficult to determine both the cause of the backwardation and whether it will persist.
"It could be a whole range of factors; a bullion bank may have overcommitted in the physical market, miners have reinitiated hedging programs since the April price dive and have to borrow gold to hedge, and that may have cascaded up the chain of physical demand," said Robin Bhar, commodities strategist at Societe Generale.
"With the gold market you don't find out the reasoning or explanation for an event until days, weeks, or even months after the event. What's strange here is that a time of seasonal demand weakness we have strong physical demand and backwardation."
PRICE CONFUSION
The lack of data and understanding highlights the market's tenuous grasp on gold prices, a fact that was reinforced by Federal Reserve Chairman Ben Bernanke's response to a question regarding the metal's confusing price fluctuations on Wednesday.
"Nobody understands gold prices, and I don't really pretend to understand them either," he said.
Usually the price of gold is seen as a measure of confidence in central banks' ability to keep inflation under control, but some believe the shape of the futures curve has now become a more important barometer of market sentiment.
"The actual message of the backwardation is that there is behind the curtains a lack of confidence in the fiat monetary system, a de facto rejection of paper money by some people who prefer the real money (gold and silver)," said Barba.
"That's why a fall or rise in gold prices is not so relevant anymore. The monetary 'fire alarm' message, courtesy of the relationship between spot and futures prices, is: run for your gold, there is not enough for all."
CREEPING OUT THE CURVE
Some believe the current dislocation is only a blip, as in 2009. After all, only the spot versus three-month futures relationship is currently in backwardation, as opposed to spot compared to longer-dated futures contracts.
But since January, the short end of the curve has gone into backwardation increasingly earlier and earlier, indicating the trend may soon start to move further out the curve.
The April 2013 futures contract went into backwardation 30 trading days before April 1, while the June contract went into backwardation 42 trading days before June 1. The August contract turned over 55 days before August 1, and the October contract flipped on July 8, 61 trading days before October 1.
Over the short term, some expect backwardation will spark a squeeze on paper investors in the gold market as the physical demand will force traders looking to cover short positions to bid up the spot price in an effort to shore up inventories.
"The bullion banks want to get gold back into contango and stop the movement of the remaining inventories by shaking the market lower, using paper leverage to do so," wrote Naylor-Leyland.
"It hasn't worked, indeed more and more investors are now seeking allocation, delivery and physical metal at the expense of synthetic products offered by the banks. The squeeze we have been waiting for is closing in, it is always darkest just before dawn."
A version of this story will appear in the July 20 issue of IFR Magazine
http://www.reuters.com/article/2013/07/19/derivatives-gold-idUSL1N0FP1CB20130719
Guest Post: How Could We Be So Wrong?, by "Icarus"
Thursday, July 18, 2013 at 4:06 pm
(special thanks to the cork)
By popular demand, I decided to turn this very well-written comment by "Icarus" into it's own, stand-alone guest post.
In the first half of his essay, Icarus lists off eleven, separate items that should have been precious metal positive over the past two years. (I'd encourage all readers to add into the comments any events that he might have missed.) In the second half, Icarus makes some reasonable conclusions and connects the current price decline to the ongoing shenanigans with the GLD, the Comex, GOFO and other ongoing events that TPTB are attempting to portray as one-offs.
I'm confident you'll enjoy reading and discussing this excellent commentary.
TF
How Could We Be So Wrong
by, "Icarus"
Let's take a trip down memory lane. Assume it's August of 2011. Gold has hit $1900 an ounce. Now assume we had a time capsule that could catapult us two years into the future. Let's jump in our time machine and jump from the present (August 2011) to July 2013 shall we? Once we get there we will learn a few things:
1. The bank depositors of Cyprus have been 'bailed in'. This means that their depositors have had their deposits stolen taken, to pay off other banks in the banking system. This template is then benchmarked by all the other major Reserve banks in the world. Message? Your money is no longer safe in the banking system.
2. The United States, owner of the world's reserve currency, has been downgraded by Standard and Poors to AA+ from AAA. For the first time in history the world's reserve currency is not one of the safest places to put your money. It's debt to GDP ratio is soaring and in spite of a total flooding of 17 trillion dollars into the economy there is no substantial recovery. No data point in existence shows a recovery yet. They all just show us bumping along the bottom with economic stagnation.
3. QE 2 is announced. Followed by QE to infinity. These two programs are euphemisms for outright money printing to pay our bills. The amount of money 'printed' by the Federal Reserve increases the money supply by a factor of 4 over a few short years. This is outright money debasement and will eventually result in massive amounts of inflation. We are just throwing trillions of trees with ink on them at the economy. This has stemmed the decline for a short time, but it has not turned the longest recovery in history around. We should be booming with this flood of money, in reality we are just treading water at the bottom of the toilet bowl.
4. The Swiss announce that they will print to oblivion to keep the Swiss Franc from rising too high against the Euro. The world's safe haven in the 20th century (the place where the world went to protect the value of their savings thru a great depression and two world wars), the bastion of stability, has now become for the first time in centuries, just another currency in the worldwide currency war.
5. The Federal Reserve puts the United States on a zero interest rate policy (ZIRP). In essence this steals 8 Trillion dollars of potential interest payments (assuming a normalized rate of 5.8%) from savers and gives it to the banks who save interest that they should have paid to savers. Savers, and retirees, and the economy in general, lose 8 trillion dollars, over 2.5 trillion a year. Things have value today because they can generate income in the future. What the FED is saying with ZIRP, is that dollars have little value in the future.
6. Venezuela becomes the first country to repatriate its gold from the vaults under the Federal Reserve Bank in New York (most countries store part of their gold hoard in NY). The Germans become the second country to ask for their gold back. They are told that you can only have one third of their gold, and they must wait 7 years to get it. Why? Could the German gold not be there? Could the Federal Reserve have absconded with this sovereign gold and they need 7 years to replace it? Is there now a gold shortage?
7. The Euro is crumbling. Portugal, Spain, Greece, Cyprus and now Italy, are in full blown DEPRESSION. They are experiencing total economic collapse.
8. China has increased its purchases of gold on the open market by 10X. In May and June they purchased 100% of global mine supply. They will be the largest purchaser of gold in the world in 2013, surpassing India.
9. Politically, the Middle East is as unstable as it's ever been. Iran continues to develop nuclear weaponry. We had the Arab Spring which deposed dictators throughout the region. The United States has been involved in conflicts in Libya, Yemen, Pakistan, and Afghanistan, and we are now selling arms to terrorists in Syria, where there is a full scale civil war that pits the Russians on one side and the U.S. on the other. And we now have boots on the ground in Jordan.
10. The Congress has done nothing to fix the problems that caused the meltdown of 2009. They passed Dodd-Frank which has more holes than Swiss cheese (of course, it was written by the banks, for the banks). They continue to run up 1 trillion dollar deficits, and the sequester (which was very painful to both sides of the aisle) cuts less than 3% of the budget. And this "savings" is now totally wiped out by the interest rate increases of just the last 4 weeks. The Volcker Rule, keeping the banks from trading in their proprietary accounts against clients has been eviscerated. So in effect we have had no movement on increased fiscal responsibility. We still have done nothing to solve the problems of the 2009 meltdown.
11. Fraud in the financial system goes into overdrive. Sentinel brokerage steals customer accounts, no one goes to jail. Politically connected John Corzine steals 1.4 Billion from his clients at MF Global, and no one goes to jail. HSBC bank, money lauders trillions of dollars from Mexican drug cartels, pays a fine worth three days profit, and no one goes to jail. Barclays and now JP Morgan is fined over a billion dollars for manipulating energy markets, and no one goes to jail. Every bank in the country committed hundreds of thousands of felony offenses by lying in court to judges and forging signatures on foreclosures, and no one goes to jail. And the biggest of all; the major banks are caught with their hands in the cookie jar manipulating LIBOR (London Interbank Overnight loan rates) which sets the cost of money EVERYWHERE (in essence they stole money from everyone in the world), and no one goes to jail.
Now let's get back into our time capsule, and return to 2011. We have a decision to make. Knowing the future events of the next two years, how do we position our portfolios in 2011 after learning about these eleven facts to come?
I submit that a prudent man would stay far, far away from the stock and bond markets. The bubbles here are getting worse, and the fraud (which increases when no one is punished) is terribly destabilizing. The degradation of the world economic output is staggering. The money printing is irresponsible. In this environment the only acceptable place to be is in something safe. The strategy should be to get a return OF your assets, not a return ON you assets. We must find a safe haven to protect us until this storm clears up. Until now, in the history of the last 120 years, that would indicate that we invest in the US dollar, the Swiss Franc, and gold. Well as mentioned, with massive money printing by both the Swiss National bank and the U.S. Federal Reserve, we are both debasing our currencies unmercifully, that leaves those two safe havens out. The only historic safe haven left for protection in 2011 is gold and other hard assets. As a matter of fact in some circles we could have been considered totally irresponsible for not putting 50 to 80% of our assets in this metal of kings.
That's what we did in 2011, without knowing these 11 items. Well, so far, we blew it. Gold, even after these 11 absolutely tremendous gold positive developments, has cratered from $1900 to $1200. The markets on the other hand proceeded to march on to all-time highs. What happened?
I think what happened can be summed up in a statement by Paul Volcker, Chairman of the Federal Reserve, back during the last crisis in 1980. When asked if he would have done anything different when he raised interest rates to 18% and destroyed the inflation of the day, he stated, referring to that time:
"Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."
Bernanke has not made the same mistake. He has obviously intervened in the gold market to keep the price down (learning from Volcker), and thus keep the dollar as an attractive alternative to gold (generating demand for dollars, that keeps our interest rates low). The FED, by law, cannot sell our countries gold to flood the world with supply and keep the price from reaching its normal market clearing value. But they can surreptitiously loan our gold out, and have the bullion banks (like JP Morgan) sell the gold into the market to hammer the price. They can also do this with German gold they hold. No one is the wiser until someone asks for their gold back. This leasing shenanigans game is why Ron Paul wanted to audit the FED and got over 250 Congressmen and Senators to cosponsor his Audit the FED bill. You think the gold not being there anymore might be the reason why the Germans have to wait 7 years to get their gold back???
As for the stock markets, Bernanke is ON THE RECORD with his famous 'wealth effect' policy. If we can get the stock and housing markets up, people will spend more money and we will jump start a recovery. Sounds like some kind of trickle down economics offshoot to me, and we know how that turned out...........Obviously they are depressing gold and pumping up the markets at the same time to further their current policy agenda.
THERE IS NO MARKET PRICE DISCOVERY LEFT when interventions like this occur. The prices of both, like their balance sheets, are simply made up.
Well I think the game is afoot and is now about to collapse. The gold used to manipulate is now all gone. Sold. There is no more gold to flood the market with. The boyz are now stealing gold from every nook and cranny they can find, to keep this ponzi scheme going. Just look at the following graph from July 2013:
The yellow is the amount of physical gold available on the Commodity Exchange (COMEX). Note that these are two graphs, the data points are not cumulative, the yellow graph and the green graph stand on their own.) Notice the severe drawdown of available metal since January of this year from 11 million ounces to seven million ounces on the COMEX. The green is the drawdown of gold from Gold Exchange Traded Funds (ETF's). Notice the drawdown of gold from 9 million ounces to less than 6 million ounces since January 2013. This depletion of gold is UNPRECEDENTED! Looks like a panic to me.
Note that the main stream media reports that the drawdowns are simply investors selling their ETF gold shares because they don't want to hold gold. Well think about this. Gold and Silver are kissing cousins. They are both considered monetary metals and they both have a very high correlation to each other. What gold ALWAYS does, silver does, albeit more violently, because it is a smaller market. They are opposite sides of the same coin.
Now explain to me, main stream media, why the silver ETF's have had substantial net gains in inventory since January. Silver is not being drained, only gold. If this were Joe average investor selling, he'd sell both at the same time!!! That's not happening! Someone is pulling gold out of these vehicles while silver is going in. And by the way, where is all this physical going? That would be China, to satisfy their insatiable increased demand for the hard stuff.
Ladies and Gentleman we have a run on the bank going on. Physical gold is going from West to East. The Bullion Banks are out of physical gold available to sell into the market to suppress the price, and now they are raiding the ETF's and the COMEX to get physical gold to suppress the price of gold. It's only a matter of time before our strategy of using gold as our insurance against collapse (a la Greece) will be vindicated. They can play these games for a while, but they cannot fool Mother Nature forever.
The market and its price discovery mechanism will eventually win. You cannot manipulate markets and ignore the law of supply and demand forever.
Regards,
Icarus
Thanks to Eric Sprott, Turd Ferguson and Grant Williams for the basic ideas presented.
http://www.tfmetalsreport.com/blog/4848/guest-post-how-could-we-be-so-wrong-icarus?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TFMetalsReport+%28TF+Metals+Report%29
Thanks EasyRider. You're right the link was taken down I even checked the original article. Thanks for posting the link.
Elizabeth Warren Discussing Glass Steagall...
Watch Liz Warren School Some CNBC Doofuses With Facts ‘N’ History
by Doktor Zoom
5:25 pm July 16, 2013
(special thanks to basserdan)
BS... Defined: Bernanke Seeks (BS) to Divorce QE Tapering From Interest Rates - OR - Economic Prestidigitation!
Reggie Middleton's picture
Submitted by Reggie Middleton on 07/18/2013 12:27 -0400
Bloomberg reports: Bernanke Seeks to Divorce QE Tapering From Interest Rates
Federal Reserve Chairman Ben S. Bernanke will have a chance to use testimony to Congress today to drive home his message that winding down asset purchases won’t presage an increase in the Fed’s benchmark interest rate.
Bernanke has said the Fed may start reducing $85 billion in monthly bond purchases later this year, assuming economic growth meets the Fed’s predictions. At the same time, policy makers’ forecasts have indicated the federal funds rate won’t rise until 2015, long after Bernanke’s second term ends Jan. 31.
... Treasury 10-year note yields were little changed at 2.53 percent as of 8:38 a.m. London time. They touched 2.51 percent yesterday, the lowest since July 5, in anticipation of Bernanke’s testimony, even as economic reports showed that U.S. industrial production rose by the most in four months in June and inflation picked up toward the Fed’s goal, supporting the case for a reduction in quantitative easing.
“He’ll say a slowing in the pace of asset purchases isn’t a tightening of policy, and it’s actually still an easing of policy just at a slower pace,” said Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management, which oversees $400 billion, and a former Fed senior economist. “It doesn’t imply that they’re going to be tightening policy any time soon. They’re not.”
Global stocks and bonds retreated after Bernanke on June 19 outlined the conditions that would prompt the Federal Open Market Committee to reduce and eventually end asset purchases. His remarks pushed the yield on the benchmark 10-year Treasury to a 22-month high and erased $3 trillion in value from global equity market value over five days.
Technically, Bernanke can say that he can taper bond purchases without raising the Fed Benchmark interest rate, for he can. He is in complete control of said rate. Reality dictates something a little different though. The Fed benchmark interest rate doesn't equal market rates. Ask Dr. Greenspan how difficult it is to get mother market rate to bend to your will by simply manipulating the Fed benchmark rate. He lost control (as if he ever had it) of market rates during his term as he tried to play economic god. Expect the same efforts and the same results from Bernanke.
I urge readers to keep in mind what I expoused in Apple Bonds Proven To Have A Nasty Taste wherein Apple bonds lose 9% in six weeks:
We Clearly & Obviously Ending A 3 Decade Bull Market, Likely At The Tail End Of The Largest Global ZIRP Experiment Ever!
And this final aspect is the kicker. We are likely culminating the end of a three decade secular bull market in bonds. Why in the world would anyone want to buy debt now, in a good, bad or mediocore company? Reference a chart of ten year rates over time, and you will see that once you get this close to zero (and the applied end to excessive ZIRP), there's no way to go but up. As excerpted from theMarket Realist site:
http://www.zerohedge.com/contributed/2013-07-18/bs-defined-bernanke-seeks-bs-divorce-qe-tapering-interest-rates-or-economic-p
Great post Cork!
Central Banks, Bullion Banks and the Physical Gold Market Conundrum
TUESDAY, JULY 16, 2013
Eric Sprott & Etienne Bordeleau
http://sprottgroup.com/thoughts/articles/central-banks-bullion-banks-and-the-physical-gold-market-conundrum/
Central Banks, Bullion Banks and the Physical Gold Market Conundrum
TUESDAY, JULY 16, 2013
Eric Sprott & Etienne Bordeleau
The recent decline in gold prices and the drain from physical ETFs have been interpreted by the media as signaling the end of the gold bull market. However, our analysis of the supply and demand dynamics underlying the gold market does not support this thesis.
For example, Non-Western Central Banks have been increasing their holdings of gold at a very rapid pace, going from 6,300 tonnes in Q1 2009 to more than 8,200 tonnes at the end of Q1 2013 (Figure 1a) while physical inventories are declining (Figure 1b) (or being raided, as we argued in the May 2013 Markets at a Glance)1 and physical demand from large (Figure 1c) and small (Figure 1d) scale buyers remains solid.
Figure 1a -1b
Figure 1c -1d
Source: World Gold Council, Bloomberg, Hong Kong Census and Statistics Department
Average premium calculated as the average premium for the following 1oz. coins, as reported by the Certified Coin Exchange (CCEX): American Eagle, Maple Leaf, Krugerrand, Philharmonic, Panda, Isle of Man and Kangaroo.
In previous articles we have argued that Western Central Banks have been filling the supply gap to satisfy the demand for physical gold.2 As shown in Figure 1a above, the official amount of gold held in the Western Central Banks and international institutions like the IMF has been steadily declining since 2000, only to stabilize at around 23,500 tonnes since 2008. Officially, this gold has primarily been sold by continental European Central Banks under what is known as the “Central Bank Gold Agreements” (CBGA) (also known as the Washington Agreement on Gold).3 Under this agreement (which expires after five years and has been repeatedly renewed since 1999), the “undersigned institutions will not enter the market as sellers, with the exception of “already decided sales” and “The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period”. Sales under the CBGA are shown in Figure 2 below.
Figure2
Source: World Gold Council4
The two points referenced above are particularly interesting because gold leasing (or swaps) has been the primary instrument used by central banks and bullion dealers to suppress the price of gold over time (Alan Greenspan testified, on 24 July 1998, to the House of Representatives that “central banks stand ready to lease gold in increasing quantities should the price rise”).5
It is important to remember that bullion banks (members of the London Bullion Market Association, or LBMA) hold gold in their vaults for their clients.6 Most of those clients, according to the LBMA, deposit their gold (or purchase gold) through an LBMA bank, for example ScotiaMocatta, in what is called an unallocated account. “This is an account where specific bars are not set aside and the customer has a general entitlement to the metal. It is the most convenient, cheapest and most commonly used method of holding metal.”7 However, what the LBMA doesn’t say is that, just like regular fractional banking, the bullion bank does not need to keep the whole value of the gold deposit in gold, but only keeps a fraction of it in its vaults, hoping that not all depositors will request their gold at once. This creates a potential shortage of physical (and an increasing supply of paper) gold and is one reason why bullion banks sometimes need to lease gold from central banks. Leasing gold is analogous to a swap or a collateralized loan, where a Central Bank gets cash in exchange for gold as collateral, and pays an interest rate on the cash loan.
The gold leasing mechanism works in the following way (also shown in Schema 1 below):8
A Central Bank leases its gold to a bullion bank for a pre-specified period (say 1 month). In exchange, the Central Bank receives cash for the value of the gold and has to pay the Gold Forward Offered Rates (GOFO) to the bullion bank. Then, the Central Bank lends the cash on the market and receives LIBOR for 1 month, with net proceeds of LIBOR minus the GOFO, which is called the lease rate. If the lease rate is positive (and it usually is), then it is profitable for the Central Bank to lease its gold. A high lease rate increases the incentive for Central Banks to lease their gold.
The bullion bank, once it receives the gold from the Central Bank, sells it on the gold spot market and collects the cash (depressing the price in the process by increasing supply in the market). For the bullion bank, this transaction is cash flow neutral and pays a carry (the GOFO rate) (the bullion bank can also buy the gold forward one month to make this a risk free transaction, or hope the price of gold stays constant or declines when it’s time to buy it back). Thus, the GOFO rate is a measure of “how much the bullion bank desires physical gold”. If it is small (relative to LIBOR, which implies a large lease rate), the bullion bank wants gold. If it becomes negative, then it means the bullion bank is ready to pay (negative carry) the Central Bank for the privilege to lease its gold (presumably to deliver physical gold to clients that redeem physical gold from their unallocated accounts).
Scheme1
In theory, at the end of the month, the bullion bank buys the gold back from the market and gives it back to the Central Bank. If the bullion bank repurchases the gold from the market, there is no net effect on overall gold supply. We say in theory because, as highlighted above, the language used in the CBGA hints at something else.
It is our hypothesis that, in practice, the bullion banks do not purchase the gold back in the market at the end of the lease to give it back to the Central Banks. Instead, they only roll the transaction over with the Central Bank, resulting in gold IOUs (paper gold, referred to as “gold swapped or on loan” under Central Bank accounting jargon, in other words, a claim on gold that someone else holds) instead of real bullion in the Central Bank’s vaults. This can be seen in Figure 3 below. There is a clear negative relationship between the amount of gold leaving the vaults of the New York Federal Reserve Bank (other Central Bank’s official gold reserves) and the lease rate (how much carry a Central Bank owns by leasing out its gold). To us, this is a clear indication that Central Banks have been leasing out their physical gold against IOUs from their bullion bank partners.
Figure 3_2
Source: Federal Reserve Bulletin, Foreign Official Assets Held at Federal Reserve Banks, Earmarked Gold & LBMA. The 1-month lease rate is shown as an annual average.
Also, oddly enough, it seems from Figure 3 that the gold bull market started at about the same time (mid-2001/early 2002) as Central Banks and Bullion Banks stopped flooding the market with leased gold.
Another interesting observation is that the timing of official sales by European Central Banks and the International Monetary Fund (IMF) (Figure 2) do not really correspond with the outflows from the NY Fed’s vault (where most of the world’s Central Banks’ gold ex-US is stored; about 30% by our calculations). This is where the “already decided sales” concept referred to earlier comes into play.9
According to the IMF, they disposed of 403.3 tonnes of gold between 2009 and December 2010.10 However, the net outflows of gold out of the NY Fed’s vault were zero for those two years (and the NY Fed is the main vault for the IMF).11 If this rather large quantity of gold did not come from another vault, then it is plausible that it came out of the NY Fed’s vault, which experienced a net drawdown of 408 tonnes in 2007-2008, a full two years ahead of “official schedule”. Given this inconsistency, it is reasonable to believe that the IMF leased its gold reserves (in the manner explained above) to tame the gold market and rescue the bullion dealers, which probably got a lot of physical gold redemption requests they couldn’t meet during the financial crisis. Then, later on, they “sold” their paper gold to the dealers to net the IOUs and settled in cash.
A similar observation can be made of the European Central Banks’ CGBAs, which all happened well after all the gold outflows from the NY Fed’s vaults.
We are of the opinion that this is what an “already decided” sale is: a Central Bank leases gold to a bullion dealer, that dealer sells the gold (or delivers it to a client) but never pays back the Central Bank its physical gold. Then later on, to balance things out, the Central Banks declare official “sales” of gold, but all that changes hands at that point is paper gold and cash, the real gold is long gone.
Lessons for the current market
It is important to remember that the bullion dealers are the same banks that are deemed too big to fail by their respective governments. Thus, it is very unlikely that Central Banks would abstain from intervening à la Greenspan in order to save their bullion bank partners from a “bullion run” (analogous to a bank run). On the contrary, if the bullion dealers get in trouble because their reserves of physical gold are too small to match redemptions of physical (anecdotes) and risk a bullion run, Central Banks will use their firepower and “stand ready to lease gold in increasing quantities should the price rise” (Greenspan, 1998).
The thing is, it might not be that simple anymore… Since the beginning of the financial crisis, we have seen unprecedented demand for physical gold (see Figure 1a-d above) while at the same time, gold miners are shutting down mines and Central Banks have been relatively quiet in terms of official gold sales (Figure 2) (depressing supply). In fact, the announcement by the German Bundesbank (the second largest gold reserve in the world according to IMF data) that they would repatriate their gold from the NY Fed’s vaults can be seen as a sign that European banks are no longer as keen to lease (or swap) out their gold.12 Other very detailed documents released at the same time show that since 2008, the Bundesbank has not made use of gold leases or swaps.13 To us, this signals that Central Banks are less and less willing to participate in the gold leasing scheme.
Still, the price of gold has experienced a large decline over the past few months, only slightly recovering over the past 2 weeks or so. Given the strong physical demand, we think that this decline was engineered by a bullion bank that flooded the COMEX (paper market), only to then redeem physical gold from the various available sources at depressed prices (i.e. ETFs, see our discussion of this topic in the May 2013 Markets at a Glance). To further support our price manipulation hypothesis, we overlay the 1-month GOFO rate with days where the gold price suffered significant declines (more than 3%) in Figure 4. Unless it is the actual price drop that sparks all this increased demand, it seems counterintuitive that the gold price would decline precipitously before large declines in the GOFO rate, which implies increased demand for physical gold from bullion dealers.
Figure 4_2
It now seems that bullion banks are in desperate need of bullion, as evidenced by the increasingly negative GOFO rates we are seeing (Figure 4 below). Remember that a negative GOFO rate signifies that the bullion banks are ready to pay holders of physical to lease their gold, in this case for a month. Historically, negative GOFO rates have happened in very few occurrences. The last one was in November 2008 at the height of the financial crisis and after which gold rose 156% from through to peak. Before that, we saw negative GOFO rates in March of 2001 (about the start of the bull market) and September of 1999 (announcement of the first CBGA).
In our view, the bullion banks’ fractional gold deposit system is testing its limits. Too much paper gold exists for the amount of physical gold available. Demand from emerging markets, who do not settle for paper gold, has perturbed the status quo. Thus, our recommendation to investors is the following: empty unallocated gold accounts and redeem your gold in physical form (while you still can), invest in allocated, physically backed products (like the Sprott Physical Bullion Trusts) or in those that have access to physical gold in the ground (gold miners).
http://sprottgroup.com/thoughts/articles/central-banks-bullion-banks-and-the-physical-gold-market-conundrum/
Just posted that on another board. Very informative article!
Montana Passes Sweeping Anti-Government Spying Bill
Submitted by Tyler Durden on 07/15/2013
by Michael Krieger via Liberty Blitzkrieg blog,
What is so interesting about Montana’s House Bill 603, which passed overwhelmingly the state Senate by a 96-4 margin, is that it was passed in April, or several months before Edward Snowden’s NSA revelations. Talk about some foresight. Hopefully, we will see many more such bills sweep across the nation, as “change” will have to be done at the local level. The central government in D.C. is hopelessly corrupt and I don’t see that changing. We must just decentralize away from the District of Criminals on our own. From the Atlantic Wire:
Privacy advocates, behold the Montana legislature and House Bill 603, a measure that requires the government to obtain a probable cause warrant before spying on you through your cell phone or laptop. HB 603 was signed into law this past spring, effectively making Montana the first state to have an anti-spy law long before anyone heard of Edward Snowden. To be clear, HB 603 passed the state Senate overwhelmingly by a vote of 96-4 in April and was signed into law on May 6.
At the time, the law might have seemed extraneous, or even paranoid. But knowing what we know now, the law seems prophetic. The law is pretty straightforward—the government can’t spy on Montanans through their electronic devices unless they obtain a warrant:
That effectively makes Montana the first state in the country’s history to pass an electronic privacy law that protects you from the government. The bill’s sponsor, Rep. Daniel Zolnikov, and Montana’s lawmakers outpaced all the states in the country when it comes to privacy.
“The younger Democrats and Republicans were the ones really for the bill. The older legislators in Helena didn’t say much for or against it,” Zolnikov told the Daily Interlake.
The above line explains precisely why the government is concerned about “an increasingly disgruntled, post-Great Recession workforce and the entry of younger, ‘Gen Y’ employees who were ‘raised on the Internet,’” as noted in the recent “Insider Threat” article from McClatchy.
http://www.zerohedge.com/news/2013-07-15/montana-passes-sweeping-anti-government-spying-bill
Full Article:
If You Don't Want the Government to Spy on You, Move to Montana
http://www.theatlanticwire.com/national/2013/07/if-you-dont-want-government-spy-you-move-montana/66962/
Special Deal
The shadowy cartel of doctors that controls Medicare.
By Haley Sweetland Edwards
July/ August 2013
(special thanks to basserdan)
On the last week of April earlier this year, a small committee of doctors met quietly in a midsized ballroom at the Renaissance Hotel in Chicago. There was an anesthesiologist, an ophthalmologist, a radiologist, and so on—thirty-one in all, each representing their own medical specialty society, each a heavy hitter in his or her own field.
The meeting was convened, as always, by the American Medical Association. Since 1992, the AMA has summoned this same committee three times a year. It’s called the Specialty Society Relative Value Scale Update Committee (or RUC, pronounced “ruck”), and it’s probably one of the most powerful committees in America that you’ve never heard of.
The purpose of each of these triannual RUC meetings is always the same: it’s the committee members’ job to decide what Medicare should pay them and their colleagues for the medical procedures they perform. How much should radiologists get for administering an MRI? How much should cardiologists be paid for inserting a heart stent?
While these doctors always discuss the “value” of each procedure in terms of the amount of time, work, and overhead required of them to perform it, the implication of that “value” is not lost on anyone in the room: they are, essentially, haggling over what their own salaries should be. “No one ever says the word ‘price,’ ” a doctor on the committee told me after the April meeting. “But yeah, everyone knows we’re talking about money.”
That doctor spoke to me on condition of anonymity in part because all the committee members, as well as more than a hundred or so of their advisers and consultants, are required before each meeting to sign what was described to me as a “draconian” nondisclosure agreement. They are not allowed to talk about the specifics of what is discussed, and they are not allowed to remove any of the literature handed out behind those double doors. Neither the minutes nor the surveys they use to arrive at their decisions are ever published, and the meetings, which last about five days each time, are always closed to both the public and the press. After that meeting in April, there was not so much as a single headline, not in any major newspaper, not even on the wonkiest of the TV shows, announcing that it had taken place at all.
In a free market society, there’s a name for this kind of thing—for when a roomful of professionals from the same trade meet behind closed doors to agree on how much their services should be worth. It’s called price-fixing. And in any other industry, it’s illegal—grounds for a federal investigation into antitrust abuse, at the least.
But this, dear readers, is not any other industry. This is the health care industry, and here, this kind of “price-fixing” is not only perfectly legal, it’s sanctioned by the U.S. government. At the end of each of these meetings, RUC members vote anonymously on a list of “recommended values,” which are then sent to the Centers for Medicare and Medicaid Services (CMS), the federal agency that runs those programs. For the last twenty-two years, the CMS has accepted about 90 percent of the RUC’s recommended values—essentially transferring the committee’s decisions directly into law.
The RUC, in other words, enjoys basically de facto control over how roughly $85 billion in U.S. taxpayer money is divvied up every year. And that’s just the start of it. Because of the way the system is set up, the values the RUC comes up with wind up shaping the very structure of the U.S. health care sector, creating the perverse financial incentives that dictate how our doctors behave, and affecting the annual expenditure of nearly one-fifth of our GDP.
It’s fairly common knowledge at this point that Congress does not allow Medicare to negotiate with pharmaceutical companies over the amount the government pays for their drugs. Each drug company simply sets a price for its own product, and Medicare either takes it or doesn’t. While that arrangement undoubtedly drives up Medicare spending—and health care spending more generally—it at least allows for some competition among the drug companies that manufacture similar products. But when it comes to paying doctors for the services and procedures they perform, the system is even more backward. In this case, Medicare actually asks the suppliers—the doctors themselves—to get together first, compare notes, and then report back on how much each of them ought to get paid.
Medicare is not legally required to accept the RUC’s recommended values for doctors’ services and procedures, but the truth is, it doesn’t have much of a choice. There is no other advisory body currently capable of recommending alternative prices, and Congress has never given the CMS the resources necessary to do the job itself.
The consequences of this set-up are pretty staggering. Allowing a small group of doctors to determine the fees that they and their colleagues will be paid not only drives up the cost of Medicare over time, it also drives up the cost of health care in this country writ large. That’s because private insurance companies also use Medicare’s fee schedule as a baseline for negotiating prices with hospitals and other providers. So if the RUC inflates the base price Medicare pays for a specific procedure, that inflationary effect ripples up through the health care industry as a whole.
Another, even more powerful consequence of this system is that while the prices Medicare and private insurers pay for certain procedures have increased—sometimes rapidly—the prices paid for other services have declined or stagnated. That’s largely because of basic flaws in the way the system is set up. For one, the RUC spends the vast majority of its time reviewing specialty procedures, which change more quickly as technology advances, rather than so-called “cognitive” services, like office visits, that primary care doctors and other generalists rely on for the bulk of their income. The result is that there are “a hundred ways to bill for removing varicose veins, and only one way to bill for an intermediate office visit,” one former RUC member told me. For another, the RUC is dominated by specialists, who have a direct interest in setting the reimbursement rates for specialty procedures much higher than for general services.
Those two factors go a long way toward explaining why we’ve seen an explosion of billing for certain types of lucrative procedures. After all, the incentives are perfectly aligned: ordering that extra test means more money for a doctor’s practice or hospital, more money for the labs, and often more money for the device makers and drug companies, too. (Oh, and, by the way, the device makers and drug companies are, not incidentally, major funders of the medical specialty societies whose members vote on the RUC.)
These manipulated prices are also a major reason why specialists are in oversupply in many parts of the country, while a worsening shortage of primary care providers threatens the whole health care delivery system. It’s precisely because the RUC has overvalued certain procedures and undervalued others that radiologists now make twice what primary care docs do in a year—that’s an average of $1.5 million more in a lifetime. While that little fact doesn’t explain everything (doctors choose their fields for a multiplicity of reasons), future income is, presumably, not entirely unimportant to a young MD.
And we’re not just talking about medical students here. Having the wrong kinds of doctors in the wrong places, with the wrong financial incentives, is one of the major reasons why Americans pay so much more for health care than do citizens in other advanced nations, and yet we live no longer.
Over the past few years, a few well-placed health care figures from both parties have spoken out—at least once they’ve left office—about how crazy this system is. “The RUC is really just a giant cabal run by the AMA,” Thomas Scully, former head of the CMS under George W. Bush, told me. “A private trade association should not have that sort of control over the biggest spending account in the government. It’s an outrageous travesty of democracy.” Bruce Vladeck, former head of the CMS under Bill Clinton, agrees, calling the RUC “a significant part of the problem.”
There have also been scathing reports issued by the Government Accountability Office, and by MedPAC, the agency that advises Congress on Medicare-related issues, as well as some hard-hitting investigative reporting by the Wall Street Journal and the Center for Public Integrity. In 2011, a bipartisan panel participated in a Senate roundtable, during which three former heads of the CMS took turns lamenting the RUC.
Yet, for the most part, the RUC continues to operate exactly as it always has—behind the scenes, without anyone, including actual doctors laboring in the clinics and hospitals across the country, even really knowing about it. (This spring, Scully told me that he went to lunch with a very high-ranking official at the CMS who had no idea how the RUC actually worked.)
The Affordable Care Act, for its part, includes a few lines that could potentially, if incrementally, limit the RUC’s power. But in general, it doesn’t much change the way the reimbursement system works. Taking on the RUC would have “started a nuclear war with the AMA,” as Scully put it, and alienated other key political allies that the administration needed to pass the law to begin with. Fixing the RUC, however, is essential to fixing health care in this country.
“Follow the money,” said Gail Wilensky, who headed the CMS under George H. W. Bush and has been critical of the RUC. “Change the way physicians are paid, and you change the system.”
The RUC, like that third margarita, seemed like a good idea at the time. When liberals were trying to pass Medicare in 1965, the staunchest opponent they faced was the AMA, which was dead set against the program on the grounds that “socialized medicine” would upend physicians’ livelihoods.
In order to get the bill passed, liberals made many big concessions to organized medicine. One was keeping the “fee-for-service” payment system, which we still have today, in which doctors bill Medicare (and private insurance companies and uninsured patients) according to every single service or procedure they perform. Another was that Medicare promised to pay physicians the “usual, customary and reasonable” rate for each of those services. One of the problems that quickly arose was that there was no benchmark for what was “usual” or “reasonable,” no nationally accepted standard for “customary” for the price of each individual service or procedure. Prices, unsurprisingly, began to skyrocket.
Someone who worked with the Bush administration in the 1980s told me a story about an ophthalmologist in Texas, known as the legendary “Cataract King.” Despite the fact that a cataract surgery had gotten much easier to perform—it took two to three hours when it was first invented, but by the ’80s clocked in at about a half an hour—he continued to charge the “customary” rate: up to $6,000 a pop. By the mid-’80s, Medicare was spending about 4 percent of its budget on cataract surgeries alone. Meanwhile, an hour-long visit with a patient resulting in a complex diagnosis fetched about forty bucks.
By 1985, doctors’ rates were, to say the least, wildly distorted and Medicare spending was outstripping the growth of both the economy and federal tax receipts year after year. Panicked, Congress amended the law in 1986 to require doctors to charge Medicare according to “historical” rates, but it was too little too late. “Historical” rates were already crushingly high, and Medicare was on the verge of collapse.
And that’s when Harvard economist William Hsiao entered the scene. In 1988, he and his team unveiled what they hoped would be a rational process for setting physicians’ reimbursement rates. The result came to be known as the resource-based relative value scale (RBRVS). By interviewing hundreds of doctors from dozens of specialties, they painstakingly compared thousands of medical procedures—everything from removing a polyp to a lung transplant—and assigned each a relative value unit (RVU) according to three main factors: one, the amount of work it takes for a doctor to perform a given procedure; two, a doctor’s practice costs; and three, malpractice liability. Every year, Congress then sets a multiplier, converting that RVU into dollars.
At the end of 1989, as part of the Omnibus Budget Reconciliation Act, Congress formally adopted Hsiao’s system, requiring that Medicare use the RBRVS in determining the prices it paid physicians. It went into effect in 1992.
The plan went downhill almost immediately. In order for the system to work in practice, new services and procedures had to be added and old ones updated every year. Certain procedures, like in the cataract surgery example, that were initially very difficult and time-consuming to perform had become steadily more routine and quicker to do, while other procedures had gotten more complex and required more skill to perform. Those RVUs needed to be adjusted accordingly. The question soon became: Who should be responsible for updating the RVUs for all those thousands and thousands of procedures?
The Bush administration, skittish of anything resembling government price setting, rejected the idea of establishing an independent council of advisers within the government. Instead, in 1991, they gave the task to the most powerful interest group in the industry, the AMA (which had, of course, graciously offered its services). “And that was the point where I knew the system had been co-opted,” Hsiao told me. “It had become a political process, not a scientific process. And if you don’t think it’s political, you only have to look at the motivation of why AMA wants this job.”
The AMA spends at least $7 million a year running the RUC, according to its own estimates, and that includes maintaining about six full-time staff members. For that, it gets a very good return on investment. The first boon is that, in order to be on the RUC, specialty societies must become dues-paying members. At a time when the AMA has struggled against being overshadowed by specialty societies, controlling the RUC prevents what might otherwise be a rapid exodus of membership. As one RUC member told me bluntly, “No one cares about AMA. They care about the RUC.” And that’s a lucky break for the AMA. In 2012, dues collection actually increased by 3 percent, topping out at $38.6 million for the year. Cha-ching.
The second boon for the AMA is that by controlling the RUC, it controls much of the source code that our health care system uses to operate. Every single one of those roughly 9,000 medical services and procedures has its own five-digit code, known as current procedural terminology (CPT), and the AMA owns them all. That means that anyone—physicians, labs, hospitals, you name it—who wants to bill Medicare, Medicaid, or a private insurance company has to purchase either AMA books and products, or products from other software companies that pay AMA royalties and licensing fees to use the CPT codes. According to its annual report, in 2012 the AMA made $83.1 million in “royalties and credentialing products,” a large chunk of which comes from licensing CPT. Again: cha-ching.
And that’s just the monetary stuff. The third boon—the real power curve—is the fact that the AMA’s control of the RUC makes it indispensible to everyone and everything in a $2.7 trillion health care industry. That includes specialty societies, primary care organizations, and medical device and pharmaceutical companies—all of whom have something big to gain or lose from the RUC’s decisions.
The AMA cannot be unaware of this staggering power. Still, its official line about the RUC is that it’s simply doing the U.S. government a favor—offering its professional recommendations free of charge. Chaired by Dr. Barbara Levy, who is also the vice president of health policy at the American Congress of Obstetricians and Gynecologists, the RUC is simply a gathering of volunteer experts who jettison their personal interests and behave “like the Supreme Court” on behalf of the public good, according to the AMA.
But in talking to a half-dozen current and former RUC members, including both generalists and specialists, the image of the committee that emerges is less a gathering of angels, cloaked by some Rawlsian Veil of Ignorance, and more akin to a health care-themed Game of Thrones. Several RUC members I spoke to mentioned that the chairwoman often reminds the committee to “Put your RUC hat on,” meaning: “Don’t think from your society’s standpoint.” But everyone I spoke to said that specialty societies on the RUC form coalitions and alliances. Two doctors told me that “personal loyalties” play a major role in determining the way that RUC members vote. “There’s no denying it’s a highly, highly, highly politicized process,” a RUC member told me.
Here’s how the process works. Every time a new procedure comes along, a special committee at the AMA called the CPT Editorial Panel decides whether or not it needs to create a new CPT code for it. The need for a new code is sometimes tied to a new device—a valve or pump or robot that, if it is to be used, requires that doctors perform a new procedure.
Importantly, it’s not the panel’s job to weigh in on whether a new procedure is more effective or cost-efficient than a traditional method. The Food and Drug Administration has to approve a new device for the panel to consider it, but other than that the panel’s job is limited. It simply decides if a new procedure is sufficiently different from existing procedures already in the CPT; if it is, then it is assigned a CPT code, and then sent off to the RUC to be assigned a relative value unit.
When either updating an old RVU or coming up with a new one, the RUC members spend most of their time debating something called “work units”—a slippery currency that combines how much time, training, technical skill, physical and mental effort, and stress are required of a doctor when performing a certain procedure or service. For example, according to the 2013 RUC database, “freezing off” a suspicious-looking lesion or freckle, known in the medical parlance as a “destruction,” has been assigned 1.22 work units; inserting a single-valve cardiac stent, 33.75.
By many accounts, the resulting debates are often spectacularly absurd. The RUC’s database features page upon page describing what exactly a doctor does when performing each procedure. How many minutes must a doctor spend waiting for a patient to get dressed or undressed? How much time does it take to scrub in, or wait around? To read a chart? Each of these questions can bring sometimes hours of haggling at the meetings.
And then there’s the even more slippery idea of how much “mental effort” or “stress” a given procedure requires. How stressful is it to, say, perform a surgery that requires a doctor to stop a patient’s heart? And, since all of these values are relative to one another, is that level of stress greater or less than having an office visit with, say, an emotionally disturbed teenager suffering from multiple illnesses?
It’s at this point that most people—both AMA representatives and critics of it—are in agreement: at best, this is a deeply imperfect system, mired by necessity in the minutiae of doctors’ actions. But while RUC supporters argue that it’s simply the best we’ve got, critics contend that by taking an already imperfect system and handing it over to precisely those groups with the biggest material interests at stake, we’re making it even worse.
Coming up with the exact number, down to the hundredth decimal point, illustrating the “work units” for a given procedure is an admittedly thankless task. But when the RUC does it, it relies to a large degree on the testimony of—who else?—the most affected specialty society on the RUC. For instance, the American College of Cardiology will give a presentation arguing for the precise amount of time and effort required to perform a cardiac stent; the urologists weigh in on how long a catheter procedure should take. The RUC’s argument here is that the most affected specialty society knows the most about how much work, time, and stress go into the procedures its members perform.
But, of course, that specialty society also has the most to gain by inflating that value. For one, it’s in that society’s direct interest to get its members paid as much as possible. For another, the most affected specialty society often receives a good chunk of its funding from pharmaceutical and medical device companies—companies that also have a direct stake in the RUC’s proceedings. When the RUC offers up generous reimbursement rates for a specific procedure, doctors generally do it more often, and that means they use more of certain drugs and devices, too. It’s a positive feedback loop—and everyone knows it.
And then there’s the fact that much of the “data” these affected specialty societies trot out in front of the RUC would not pass the laugh test in a high school stats class. After all, these specialist societies get their data from surveys of their own membership—a group of people who stand to gain directly and materially from making a procedure seem as difficult, time-consuming, and stressful as possible. And respondents can’t exactly plead ignorance. They know darn well how the results of those polls will be used, and in case they forget, the surveys are printed with a reminder: your response is “important to you and other physicians because these values determine the rate at which Medicare and other payers reimburse for procedures,” according to a 2010 Wall Street Journal article.
What’s more, RUC rules require as few as thirty survey responses—a meager sample size, even if everyone involved weren’t both self-selected and personally invested in the results. “You wouldn’t use the results of thirty surveys to determine anything, much less billions in taxpayer cash,” a former adviser to the RUC told me.
There’s good reason to take into account the experience of those doctors who perform the procedure in question, said John Goodson, a primary care physician and associate professor at Harvard Medical School who has written about the RUC, “but if the process of assigning values to physician services is to be trusted, then the profession should hold itself to the same high, evidence-based standards that it does in other domains.”
Another flaw in methodology comes from the fact that the RUC often relies on records from teaching hospitals in determining how long an operation takes, even though teaching hospitals often have longer surgery times than nonteaching hospitals. A 2006 study by the nonprofit health care research firm RTI International compared the amount of time the RUC suggested for sixty surgeries to data from 148 hospitals’ actual surgery logs. The RUC’s estimated times were often longer—sometimes by up to two hours.
Perhaps the most damning aspect of the RUC’s methodology, however, is that, while its members often spend quite literally hours debating if a certain procedure takes three minutes or just two, the RUC never so much as flicks at the question of how much—or even whether—a procedure actually benefits patients. This failure, which is part of a broader flaw in federal health care policy, is enormously damaging to the practice of American medicine. Among other things, it means that many patients wind up undergoing expensive procedures for which more effective and less costly alternatives are available.
The AMA’s main defense against the charge that the RUC skews health care spending toward specialists’ costliest procedures is that the system is self-policing. The members are working within a fixed budget, the AMA says, so they keep each other in check: if the RUC votes to raise the RVU of one procedure, it has to account for that increase by decreasing RVUs of other procedures elsewhere. And that’s true—as far as it goes. The process does indeed involve much squabbling among specialist societies, and RUC representatives do sometimes end up voting to lower codes that would positively affect their own societies. “There’s a certain calculation that happens, and people definitely vote against themselves,” a former RUC member told me.
But this inter-society bargaining occurs in a context in which there’s already a baked-in directional bias toward increasing the value of technical procedures, which are updated regularly and constantly fine-tuned, rather than cognitive or diagnostic services, which are mostly left alone. It also occurs in a context in which one side is politically weaker than the other. The most important cleavage within the RUC is between specialist doctors, who make the bulk of their money billing for procedures, and primary care doctors, who generate most of their income from office visits. While the primary care docs make up roughly 40 percent of physicians nationwide, they have only 14 percent of the votes on the RUC. Primary care physicians now have four rotating seats on the committee—up from just two seats a few years ago—out of a total of twenty-nine voting seats. (Of the thirty-one-doctor panel, two permanent seats are nonvoting positions.) Since a vote passes with a two-thirds majority, their political clout is extremely limited.
In 2005, this baked-in two-faction system erupted into a full-blown war during a RUC meeting when the two representatives from primary care threatened to leave the committee if it did not increase compensation for office visits, according to people who were present at the time. Powerful specialty societies, who didn’t want to see the amount of the pie remaining to pay for procedures decreased, vehemently opposed the idea.
Dr. Tom Felger, a former director of the American Academy of Family Physicians who was on the RUC at the time, told me that the American College of Surgeons had even created a spreadsheet, which they shared with other surgical specialties, illustrating exactly how much the RUC could increase the value of the office-visit CPT codes without affecting surgeons’ income. “They had done the math. They knew the facts,” said Felger, who represented the AAFP at RUC meetings for a decade. “When I saw it, I thought, ‘Wow-ee, this is it—now that’s collusion.’ ”
In 2007, the RUC did finally vote to increase the RVUs for office visits, redistributing roughly $4 billion from different procedures to do so. But that was only a modest counter to the broader directionality of the RUC, which spends the vast majority of its time reviewing, updating—and often increasing—the RVUs for specific, technical procedures that make specialists the most money. Because of the direct relationship between what Medicare pays and what private insurers pay, that has the result of driving up health care spending in America—a dynamic that will continue as long as specialists dominate the committee.
And despite the RUC’s vote to increase office-visit codes, the large payment gap between primary care doctors and specialists still exists. In 2012, radiologists and orthopedists made on average nearly twice as much ($315,000) as pediatricians ($156,000), while family doctors and those specializing in diabetes and endocrinology made nearly $140,000 less than urologists. “If … a primary care doctor is making a fraction of what an orthopedist is making, then that distorts the health care system in a whole variety of different ways,” said Vladeck, the former head of the CMS under Clinton. “You really have to think about what that’s doing down the line.”
One effect is that fewer young doctors choose to go into primary care. Another is that existing primary care docs cram more and more patients into their schedules to make up cost on volume and, as a result, have only a few minutes to consult with each one (see Candice Chen, “A Day in the Life of a Primary Care Doctor,” page 42). “If you run a practice and have bills to pay—that’s going to weigh on you,” says Kavita Patel, a primary care internist at Johns Hopkins Medicine and former health care adviser at the White House. “I see twenty-eight patients in a day. I spend seven to eight minutes with a patient. That’s unrealistic—it’s crazy.”
The good news is that there’s been some incremental progress in the past few years. For example, a more empirical system is now in place for selecting the CPT codes that the RUC reviews every year. The CMS has also cracked down on certain types of redundant billing. “We’ve reduced payments for high-cost imaging quite significantly,” Jonathan Blum, the current director of the CMS, told me. “And we’ve eliminated payment codes we thought were overvalued, contrary to recommendations of the RUC.”
The CMS touts that in the last couple of years it has accepted only 60 percent of the RUC’s recommended RVUs—down from an average of about 90 percent over the past twenty years. (For technical reasons, it’s fair to say that the 60 percent number is somewhat exaggerated, but it is still a step in the right direction.)
The Affordable Care Act also takes some incremental steps toward reforming the payment system. It requires that the CMS create new “mechanisms” for establishing the physician fee schedule, which can include increasing its own in-house data collection and analysis to correct, corroborate, or refute the RUC’s recommendations, especially for inputs that are more easily measured empirically, like determining how long on average a given surgery takes. To comply, the CMS recently commissioned two reports from the RAND Corporation and the Urban Institute to advise the agency on how best to do that.
The CMS, in cooperation with the AMA, is also considering rolling out new codes that may make it easier for primary care doctors to bill for services for which they weren’t previously compensated. This year, for example, they introduced two so-called transitional care management (TCM) codes that will allow doctors to bill Medicare for the time they spend helping patients transition from an in-patient setting to another community or their homes.
Yet while some of these incremental changes have been supported by the AMA and the powerful specialty societies (which, indeed, have nothing to lose from, say, TCM codes), other attempts at reform have been met with fierce push back—from organized letter campaigns to intense lobbying—and it is not clear if they will survive.
“CMS is in a no-win situation,” says Vladeck. “They’ve got extremely powerful forces making extraordinary amounts of money, and if CMS tries to change that, it’s really easy for the providers to say, ‘This is going to impair access,’ or ‘This is going to hamper care,’ even if there’s zero reality to that claim. People like doctors and nurses, and they don’t like government bureaucrats.”
Even if these incremental steps remain in place, some critics argue they are akin to frosting on a rotten cake. “You can make these tweaks,” says Brian Klepper, a health care analyst and principal at WeCare, a primary care clinic and medical management firm, “but what you’re doing is ignoring the fact that this system is fundamentally insane. It’s so corrupt and collusive, it’s not something that can be incrementally fixed.”
Long term, there are two basic options to really solving the problems caused by the RUC. The first is to take the process away from the control of the AMA and put it in the hands of a well-resourced group of experts under the auspices of the federal government. This might take the form of a panel of doctors employed by the government, or of an advisory committee of representatives of different medical societies but with greater representation of primary care doctors. While the latter set-up would hardly eliminate all conflicts of interest and political horse trading, such a committee would at least have to meet federal requirements for disclosure of all conflicts of interest. It would also be required to publish minutes from the meetings, data from any surveys used, and so forth. That would be a big improvement over the current, closed-door policy at the RUC, which, because it’s convened by a private entity, the AMA, enjoys First Amendment freedom from federal disclosure rules.
This option, however, is politically tricky. “The AMA and these medical specialty societies have power, and they’re not wild about seeing that power diluted,” said Zeke Emanuel, a former special adviser on health policy to the Office of Management and Budget and the National Economic Council, and an oncologist. “So yeah, if you ask the sober policy community, ‘Should we do this?’ their opinion is yes. But when it comes to this, the sober policy community has almost never held sway.”
In 2011, Washington Democratic Congressman Jim McDermott proposed a bill that would have furnished the CMS with resources to assemble an independent council of advisers. It was met with a strongly worded letter from the American College of Surgeons the day it was proposed and died in committee that afternoon.
Some reformers point to a provision in Obamacare that might allow for an end run around Congress. The law creates a new entity, the Independent Payment Advisory Board, which, if Medicare costs outstrip the Consumer Price Index, will have the power to cut or change Medicare provider payments unilaterally. Its decisions can be overturned by Congress only if lawmakers pass alternative cost-cutting measures of equal size. Statutorily, IPAB could create a government-run equivalent of the RUC. Whether it will ever get a chance to exercise that power, however, is an open question: IPAB is a major political target for both Republicans who are demanding its immediate abolition and some Democrats who enjoy close ties to the medical drug and device industry.
The second option to solving the RUC problem would be to get Medicare out of the business of funding fee-for-service medicine. Reformers have been complaining for years that paying providers per procedure creates incentives for gaming and overuse that are difficult, if not impossible, to overcome. Under Obamacare, the CMS is already taking modest steps away from fee-for-service billing by expanding experiments in “bundled payments,” whereby providers are paid a lump sum to take care of patients with certain conditions, like diabetes or heart disease. The AMA, aware of the growing backlash in Washington against fee-for-service, has endorsed some of Medicare’s bundling initiatives.
But we need to go much further. It’s no coincidence that numerous studies have found that the best-quality and lowest-cost health care in America can be found in systems like Veterans Affairs and Utah’s Intermountain Healthcare where doctors are on salary and paid for keeping their patients well, not according to a fee-for-service system. As this magazine has argued (see Phillip Longman, “The Cure”), the federal government should set a certain date at which Medicare will pay only for health services provided by integrated systems.
Such a move would be fiercely resisted by organized medicine, and specialist societies in particular. But it would be the surest way to control the nation’s health care costs while improving health outcomes. And it would have a delightful side benefit: with fee-for-service eliminated, there would be no need to have thirty-one doctors sit in a ballroom in Chicago and centrally plan the pricing minutia of thousands of medical services and procedures. The RUC, in other words, would be made obsolete.
Haley Sweetland Edwards is an editor of the Washington Monthly.
http://www.washingtonmonthly.com/magazine/july_august_2013/features/special_deal045641.php?
Cyprus Deposits Theft Bang Moment Implications for All Bank Deposits
Jul 14, 2013 - 11:42 AM GMT
By: John_Mauldin
Future shock is the shattering stress and disorientation that we induce in individuals by subjecting them to too much change in too short a time. – Alvin Toffler
What is it about humans that we fail to see a crisis in advance, yet when we look back, its likelihood or inevitability so often seems blindingly obvious? Rather than a flaw, our under-reliance on foresight as opposed to hindsight is perhaps a necessary evolutionary design feature that has allowed us to make rapid progress as a species (especially over the last few thousand years), but in a complex modern society it can really create quite the crisis for individuals. This week we resume our musings about Cyprus, to see what that tiny island can teach us about our own personal need to engage in ongoing critical analysis of our lives and investment portfolios. Cyprus is not Greece or France or Spain or Japan or the US or … (pick a country). I get that. No two situations are the same, but there may be a rhyme or two here that is instructive.
This Country Is Different
In 1974, Turkey invaded Cyprus. Eventually the island was divided into two zones, and Greeks in the Turkish zone, like Turks in the Greek zone, were forced to leave with only the clothes on their backs and little else. That was a defining moment for Cyprus, and the aftershock is still evident when you get past the normal polite conversation. Plus, the wall dividing the two countries is always there when you are in the capital city of Nicosia, although lately there are a few places where you can cross into the other zone. The first night I was in Nicosia, we ate dinner outside at a Greek taverna (what else?) that stands almost in the shadow of the wall.
One hundred years after the Civil War, the South of my childhood was still mixed up with the aftereffects of that war. The war in Cyprus was less than 40 years ago. Another evening we went to a local club where the members were Greeks who had been expelled from a particular neighborhood in the Turkish-occupied area. Many looked young enough that they could not have been alive during the war, but the memory of the "old neighborhood" was still strong among them.
These people lost homes and businesses, jobs – everything. They had to start over. (I am sure it was that way for the Turks who had to relocate as well.) But for the next 40 years there was very steady economic growth, 4% or so a year over time. The people took advantage of what they had. There was no university, so children went abroad to study and work and then came back, generally with skills. The legal and accounting professions grew particularly strong. Like two other former British island colonies, Singapore and Hong Kong, Cyprus became a financial center. Fifty double tax treaties later, the island had become a place to domicile companies, handle taxes and accounting, etc.
And then they branched out into banking. After the creation of the euro, the deposit base of Cypriot banks went through the roof, until it was up to six times the size of local GDP (depending on whom you believe – official sources make it closer to five times). By some measures, Cyprus had the second wealthiest population in Europe and certainly one of the best educated. Twenty-five percent of the world's ships were operated under the flag of Cyprus. Because the country had been a member of the nonaligned movement in the '80s (remember that?), it had good ties (and double tax treaties) with Eastern Europe and the USSR. Some of the kids went to university in Russia and developed contacts there. After the collapse of the Soviet Union, it was natural for Russians to use Cyprus as a conduit to the West.
Cyprus has, by some accounts, the best beaches in the Mediterranean, and so more and more people came and built vacation homes. They brought their money with them and deposited it in the local banks and took out loans to build their homes. Real estate prices climbed and climbed. Below are Cypriot bank deposits and loans from 2009 through April of this year (data from the central bank).
Unemployment was quite low, less than 4% in 2008, although the global credit crisis led to a gradual rise (though nothing like that seen in the rest of Europe). Much of the new unemployment was in the construction industry, which fell into a slump along with the rest of Europe during the crisis.
Banking soon became the biggest industry. There were more banking branches per capita in Cyprus than anywhere else in the world, more than double the European average. And there were over 40% more employees per branch than in the average eurozone country. Money was easy to get, so debt exploded by over 50% in both businesses and households in just six years, from 2005–2011.
The country had always run a current account deficit, but by 2008 that deficit had topped 15%, keeping pace with Greece's and Portugal's. However, earnings and productivity had more than kept up. Cypriots worked hard and offered good value for their services. They saw themselves as different from the other Southern European countries. But, as in much of the rest of Europe, public-sector employment doubled from 1990, with the second-highest government wage bill (behind Denmark's) and a monstrous 50% growth in social benefits in the last 10 years.
Still, starting in 2003, public debt-to-GDP actually fell. Why ring the alarm bell when things are getting better?
Cyprus: Public sector debt as % GDP 1995-2012
There were in fact no alarms bells ringing as 2012 opened. But there should have been. Cyrpiot banks were flush with cash. They bought foreign banks in Greece and Russia. They made ever more loans and then looked around and decided that Greek sovereign debt was something they needed more of. And then came the Greek sovereign debt crisis, and the capital base of the Cypriot banks was essentially wiped out. But the ECB and the EU had bailed out Irish and Spanish banks; and so depositors in Cyprus, many of them Russian, decided, along with the local citizens, to leave their money in the banks.
The country had been under the parliamentary control of the Communist Party since 2008. Seriously. Supported by the Orthodox Church. (Note that public debt began its serious rise after the communists came to power). No one reined in the banks, and they grew ever fatter and more exposed until the crisis hit. Then Cyprus could no longer fund its debt and needed EU help. Further, the Central Bank of Cyprus (not to be confused with the commercial Bank of Cyprus) had to make emergency liquidity loans to Cypriot banks that had to meet demands for withdrawals and could no longer raise capital. There was not a bank run, but there was a fast-paced walk.
The ECB balked, as the quality of the collateral offered did not come close to the standards of the Emergency Lending Assistance (ELA) program. The government of Cyprus needed money to fund its basic needs as well as to "roll over" its debt as it came due. The EU basically declined to negotiate, as there was a Cypriot election scheduled for late February, and the EU preferred to wait to see the results before acting. There was talk of a "bail-in" (where depositors would shoulder some of the loss), but as usual that proposal came from the Germans, and the rest of Europe would surely not agree.
The new president assumed office and saw immediately that the country was in trouble. He tapped Michael Sarris, a "technocrat," to be his finance minister. Sarris was the man who had helped bring Cyprus into the euro and who oversaw the reduction in Cypriot debt. While he was not a member of the winning political party, he had been at the World Bank and had relationships with many of the finance heads of Europe.
Sarris went to Brussels, only to find no friends of Cyprus there. The Germans privately told him they would approve no bailout of Russian depositors (rumored to account for over half of the base of some of the banks) prior to the German elections this fall. Cyprus was seen as a money haven and a place for rather loose tax accounting. I have to admit that many of the Cypriots I talked to knew that money laundering was going on. It was a very open secret. Cyprus had very strict rules, but it seems there were ways to engineer exceptions.
In the end, Cyprus makes no difference – that was the perception in Europe, and while they were just talking a few billion euros here and there, a fraction of what Ireland or Spain needed, there was just no sympathy for Cyprus. Many of the European finance ministers wanted to establish the questionable principle that bank deposits were no longer sacrosanct, and Cyprus was just not seen as a systemic risk. The best deal Sarris could get was a 6.75% "tax" on deposits of less than €100,000 and 9.9% above that, with the aim of raising €5.8 billion. That was on a weekend, and by Monday, when Sarris returned, the indignation in Cyprus had grown to the point that not one politician voted to accept the deal.
A bank holiday was declared and Laiki Bank was put into receivership and closed as a "bad bank," but within a week the EU decided to insure all deposits up to €100,000, the number that "everyone" had understood to be the safe deposit amount. The banks eventually reopened, but Cyprus placed capital controls on deposits and limited withdrawals. A euro in a Cypriot bank was no longer the same as a euro in an Irish bank.
The Economist wrote shortly thereafter:
"The Cypriot deal has no coherence in the larger context. The euro crisis has been in abeyance for a few months, thanks largely to the readiness of the European Central Bank to intervene to help struggling countries. The ECB's price for helping countries is to insist they go into a bail-out programme. The political price of going into a programme has just gone up, so the ECB's safety net looks a little thinner. The bail-out appears to move Europe further away from the institutional reforms that are needed to resolve the crisis once and for all. Rather than using the European Stability Mechanism to recapitalise banks, and thereby weaken the link between banks and their governments, the euro zone continues to equate bank bail-outs with sovereign bail- outs. As for debt mutualisation, after imposing losses on local depositors, the price of support from the rest of Europe is arguably costlier now than it ever has been."
Since then, the crisis has deepened. Deposits of over €100,000 in Laiki Bank, which was the second largest bank in Cyprus, have been completely wiped out. The bad debts of Laiki Bank were forced into the Bank of Cyprus, saddling their depositor base with approximately 60% losses.
If you had a business with over €100,000 deposited in Cyprus, you are likely out of business. Many businesses that were going concerns on March 14, 2013, when the crisis fully erupted, were out of business a few days later. All the employees lost their jobs and their benefits. Unemployment will soon reach 20%. For now, all of the branch banks are open, but at least half will soon be shut.
On an ironic note, the EU resisted any talk of Russian banks coming in to take over the failed Cypriot banks. Now it looks as if Russian citizens may own over 50% of whatever is left of the Bank of Cyprus.
The Bang! Moment Shock
Cypriots are deeply shocked by these events. From "insiders" who sat on boards to politicians and ordinary citizens, no one can believe that the EU treated them the way they did. I was asked time and again, "How could this happen?" and not just by ordinary citizens.
I talked with one lady who had just retired from the Bank of Cyprus. She had 100% of her pension and life savings at the bank and now faces losses of up to 60%. She had no idea the crisis was coming. Interestingly, she and others I spoke to insisted that the Bank of Cyprus was a good bank. But when asked if she would redeposit her money in a Cypriot bank when (if) she ever gets it out, she shook her head no. The trust in the system is gone.
I talked with Symeon Matsis, a man in his early 70s who was at one time in charge of planning at the Ministry of Finance. He carried a copy of This Time Is Different by Rogoff and Reinhart. It was dog-eared and full of notes. "I am reading it so I can try to understand what happened to us. The more I read the more I understand that they were describing Cyprus. And we did think that 'This country is different.' Which is why the crisis has been such a shock to our local culture."
The Cypriots believed not just that their country was different but also that the stability they had seen for 40 years was normal and easy to achieve. Why would it end? They were just doing their jobs, and everything seemed OK … until it wasn't.
Humans are hardwired to be optimists. Keeping our chins up is the only way we can keep working today and have hope for the future. If we lose that optimism, what Keynes called our "animal spirits," then why should we take risks? And the growth of free markets and capitalism over the last 500 years is nothing if not the growth in our ability to tame risk, through institutions such as insurance companies and corporations and mechanisms such as securitization and pensions. (I highly recommend the masterful book, Against the Gods: The Remarkable Story of Risk, by the late and sorely missed Peter Bernstein. This is on my list of must-read books for everyone who asks.)
But with all the controls we have created, we still have not reduced risk to nothing. And the biggest risk is that created by our own politicians and institutions – by those we trust to somehow protect us from risk.
We write laws to protect us from politicians and government, limiting the power of the state to encroach on our lives. The citizens of Cyprus thought they had rules protecting them, too, but at the end of the day, there were no rules.
The central bankers and finance ministers of Europe are making the rules up as they go along. The monstrously long EU treaties and other eurozone agreements are wide open to bureaucratic interpretation.
If you live in the EU, you now must understand that the central risk to your financial well-being is the very governments you have asked to protect you from that risk. Many of those governments have made promises they cannot keep. I wrote a few weeks ago about the problems in France. I heard from some French readers who disagreed with me. The gist of their arguments boiled down to "we are different."
I agree that France is different in the sense that France will find some uniquely French way to deal with its crisis of too much debt and leverage, a government that is too large, and a system that is sclerotic. But whatever that is, it won't save France. French citizens and their politicians feel that their pensions, investments, and lifestyles are safe. Yes, things may have to change, they say, but not in any fundamental sort of way. They feel pretty much like the citizens of Cyprus did until March.
The word catastrophe is the same in English and French. And at some time in the future, lacking serious reform, a catastrophe is what France is facing. The same is true of dozens of countries in the "developed" world.
We love to tell ourselves that this time is different. But outcomes among countries with debt and deficits out of control, constrained by a limited ability to grow their way out of their problems, are unmistakably similar. Each country has its own reasons for thinking it is different, and right up until the end it goes on telling itself that it is. And then people are shocked when one day they wake up to a very different reality.
Michael Sarris did not come back empty-handed. He came back with billions of euros from the EU and the ECB. It just wasn't enough to keep things the way they were. The same plotline is repeated in Greece, Spain, and the rest of peripheral Europe.
Europe is making up the rules to deal with its crisis. Do you remember my writing about the very creative way the Irish dealt with their debt? Where was that in the rules? When the next phase of the crisis hits, the Europeans will make up more new rules. And that near certainty poses a serious risk for Europe.
Of course, we in the US are different. We have the rule of law. That's what we all learn in school and what we keep telling ourselves, anyhow. Well, except that we find the President now wants not to have to deal with a law he helped pass, and so some third assistant at Treasury was appointed to mention as everyone went home for the holiday weekend that parts of the Affordable Care Act will be postponed without consulting with Congress, which is supposed to be involved in the whole law thing.
It's not just this president; it's everywhere. We have wandered far down the path from the rule of law to rule by lawyers. We have a Congress that refuses to deal with our deficit crisis in any manner. We have a central bank that is afraid to let the stock market learn to cope without easy money and financial repression, thereby making the bankers and finance world rich but hurting the average citizen. Indeed, low rates are killing those who worked and saved all their lives and now need to receive at least modest returns on their savings just to live.
My suggestion is that you pay attention to what is going on around you. If things are out of balance, do what you can to not get caught in the problem. It is almost never, ever different this time. You do not want to experience your own personal Bang! moment.
Newport, NYC, Maine, and Montana
After being seriously sick for 12 days, I am finally almost back to normal today; and I may even try to get to the gym tomorrow, although I may just touch the weights rather than actually lift them. Next Sunday I go to Newport, Rhode Island, for a week of intense involvment with a planning meeting of the Office of Net Assessment of the US Defense Department. A small group of us are tasked with developing a document that offers alternative scenarios for how things may work out in the future. It is quite the serious group, and I am honored to be invited. The sessions run all day and often into the evenings. It is a very eclectic group from a dozen disciplines, and I learn a great deal more than I impart.
Then I will stay in NYC (or somewhere up there) for a few days before going to Maine for the annual Shadow Fed Fishing Trip. That is always a good time with old friends. This year Bloomberg will cover the weekend with live broadcasts and interviews.
I will then return to Texas, and other than a trip to Montana to spend some vacation time on a lake with my friend and partner Darrell Cain, I really think I will stay in Texas, even through August. Home is just feeling very good after the last 12 months of almost constant travel. And while there are a few trips in the fall, the schedule seems oddly light, which is fine. I am sure things will come up. And I notice that WorldCon, the international science fiction and fantasy book conference, comes to San Antonio around Labor Day this year. I have always liked the Riverwalk. Might be a time to visit.
It is time to hit the send button. It is still light outside this evening, so I did something right this time, schedule-wise. Have a great week.
Your thinking economics is stranger than science fiction (and maybe even scarier!) analyst,
John Mauldin
subscribers@MauldinEconomics.com
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.JohnMauldin.com.
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http://www.marketoracle.co.uk/Article41388.html
GATA's Bill Murphy on the Manipulated Gold Drop and a Gold Manipulation Linkfest[er]
Submitted by EB on
07/13/2013 15:08 -0400
Spilled ink...spilled pixels...it's time to spill some electromagnetic broadcast waves [and Comcast fiber photons] over the recent drop in gold price and just how exactly the global gold cartel operates. And Bill Murphy of GATA begins by describing his oganization's mission at 2:22 in:
GATA's Bill Murphy on the Manipulated Gold Drop and a Gold Manipulation Linkfest[er]
Submitted by EB on
07/13/2013 15:08 -0400
Spilled ink...spilled pixels...it's time to spill some electromagnetic broadcast waves [and Comcast fiber photons] over the recent drop in gold price and just how exactly the global gold cartel operates. And Bill Murphy of GATA begins by describing his oganization's mission at 2:22 in:
Breakdown: Gold and Silver Exploration Stocks in BC, Canada
Visual Capitalist
http://www.visualcapitalist.com/breakdown-gold-and-silver-exploration-stocks-in-bc-canada
Why Is JPM Hoarding Silver?
Thursday, July 11, 2013
TF Metals Report
There's a lot going on and I'm diligently trying to connect all of the dots.
In fact, there are so many dots to connect, I don't know where to start. I guess we'll start with price. Surprise, surprise! The Bernank tipped his hand yesterday regarding QE8 and really moved the markets. Stocks, bonds, the metals...nearly everything has rallied. The only victim was The Pig, which immediately fell over 2 points, which is an historic, monstrously large move. I don't ever recall seeing a POSX move of that size before. Amazing!
The metals have rallied but the shorts remain in firm control, at least for now. We got a bit of a panic squeeze in the afterhours late yesterday but, once London opened, things we're jammed back down. (Why anyone in their right mind buys gold futures between midnight and 2:00 am NY time is beyond me.) The charts look better and it's always nice to see some green on the screen but don't go getting carried away just yet. Momentarily clearing $1300 and $20 is nice but we really need at least $1350 and $21 before we can begin to get excited. Until then, just keep stacking your physical, a little bit at a time. For example, I ordered 50 ASEs late Tuesday. Glad I did!
OK, let's dig into the weeds a little bit and see what we find. LOTS of talk about the negative GOFO rates out there...which continue negative for the 4th consecutive day...which is unprecedented. What the heck does this indicate? My friend, DenverDave, does as good a job as I've seen explaining the implications. If you haven't yet, please take the time to read this: truthingold.blogspot.com/2013/07/gofo-explained-and-why-its-now-very.html
So, what other indications of shortage and backwardation are out there? Well, we've got this from Harvey:
"Tonight, the Comex registered or dealer inventory of gold falls below 1 million oz to 985,969 oz or 30.66 tonnes. This is getting dangerously low. The total of all gold at the comex (dealer and customer) falls again and registers a reading of 7.095 million oz or 220.680 tonnes of gold. JPMorgan's customer inventory remains constant at 136,380.609 oz or 4.24 tonnes. It's dealer inventory also remains constant at 401,877.493 oz but it still must settle upon contracts issued in the June delivery month which far exceeds its inventory. The total of the 3 major gold bullion dealers( Scotia , HSBC and JPMorgan) in its Comex gold dealer account registers only 26.03 tonnes of gold. The total of all of the dealers falls to 30.66 tonnes!! And tonight, Brinks dealer inventory falls to a record low of only 4.18 tonnes of gold!!"
Let's see...The Banks only show 30.66 metric tonnes of registered (approved and ready to be delivered) gold. This may sound like a lot but it's not. Check these two charts below:
These two charts came from Jesse's site and he's got a terrific piece on the subject that you should read by clicking here: jessescrossroadscafe.blogspot.com/2013/07/registered-gold-on-comex-breaks-million.html
So, inventories are extremely low and falling. The Bullion Banks (at least the U.S.-based ones) are now demonstrably long Comex gold futures. And now we have negative GOFO rates which seem to indicate a true tightness and lack of desire to part with physical gold, even in the face of an easy short-term profit. What the devil is going on here? Are we finally seeing the entire fractional reserve bullion banking scheme come apart at the seams?? It certainly appears that way.
And now to the title of this post. It appears, on the surface at least, that JPM is aggressively hoarding physical silver. Uncle Ted and Andrew have been all over this for some time now. Let's review. First Andrew.
Again, even if you're not an active trader, being a member of "Turd's Army" is well worth the money. Besides an ongoing daily commentary with instant notification of any trades he makes, Andy writes up a weekly commentary which he publishes every Sunday. This is, hands down, the most important and valuable newsletter you will ever receive. If you'd like to sign up, click here: www.coghlancapital.com/daytrades-application?ak=turd_army. Anyway, Andy has been noting to subscribers that, for about the past three weeks, there has been a large, institutional buyer appearing at each and every London silver fix. Because of the size of the orders, this buyer could only be a Bullion Bank and he has deduced that is likely JPM. So, if Andy is correct (and I have absolutely no reason to doubt him), then suddenly JPM has taken to quietly acquiring as much physical silver as they can.
Now, add to that what has been going on this month at The Comex. Uncle Ted (another simply outstanding newsletter you should take: www.butlerresearch.com) has been all over this since the first of the month. Back on Saturday he wrote this:
"I believe the statistics from the first six days of the July COMEX silver futures contract provide enough data for attention. The standout feature for the first week of deliveries against the July silver contract indicates that JPMorgan has taken roughly 90% of the metal offered for delivery, or a total of 1637 contracts out of a cumulative total of 1828 delivered so far. In turn, of the silver contracts stopped or accepted by JPMorgan, 90% (1479 contracts) were for JPMorgan’s own house or proprietary trading account. In other words, JPMorgan took delivery of roughly 7.4 million ounces of silver in the COMEX warehouses for their own benefit and risk".
He followed that up yesterday with this:
"A quick note on JPMorgan’s unusual taking of delivery of silver in the current July contract I first mentioned on Saturday. In the two delivery days since that review, JPMorgan has taken (stopped) an additional 369 contracts, 350 of which were for the bank’s house or proprietary trading account. Of the 2220 total contracts delivered so far in the July COMEX contract, JPM has taken 2006 contracts, including 1829 contracts for the bank’s own house account. Over the past two days, customers of JPMorgan have delivered close to 200 silver contracts as well, raising the question if JPMorgan is double dealing. Another point is that the 1829 contracts (9.145 million oz) that JPM has taken in its own name is above the level of 1500 contracts that COMEX rules dictate can’t be exceeded in any one delivery month by any single trader. Hey – have you ever heard of a rule or regulation that JPMorgan couldn’t evade? Me, neither."
There are still about 1,200 July contracts that remain to be settled so we'll see where those go...but what the heck is going on here? Of the 2,220 July13 contracts that have been settled so far this month, JPM has claimed over 90% of them. Further, 90% of those have gone directly into JPM's own house account!
So we've got JPM soaking up as much Comex silver as they can without disturbing the price downtrend AND we've also got JPM appearing each day at The Fix, buying up as much silver as possible there, too. Connecting these dots leads me to this conclusion:
JPM is getting out of the silver manipulation game. Perhaps they've been warned by the CFTC. Perhaps they simply see the writing on the wall. Again, it's impossible to say. What we do know is:
During this 9-month decline, they've trimmed their naked Comex short position from roughly 35,000 contracts down to approximately 15,000 contracts.
The startling, surprising and historic rise in the "other commercial" gross long position from 40,000 to over 60,000 contracts has likely prohibited them from reducing their naked short position to zero.
So, JPM sees the writing on the wall and is left with three choices:
1. Cover the rest into rising prices. They tried that in 2011 and it didn't work so well.
2. Go the "potato" route and simply default on delivery. www.tfmetalsreport.com/blog/4348/simplot-scenario-silver
3. Continue to cover the naked shorts as much and for as long as you can BUT also acquire as much physical silver as possible so that you actually can physically deliver against all your short paper if it comes down to it. If you're short 10,000 contracts and suddenly those 10,000 longs stand for delivery, it would greatly benefit you to actually have the 50,000,000 ounces on hand. Settle it out and it's over.
Again, this is just a hunch...an attempt to connect some dots. Let's watch this situation closely as we head through the month and see if it continues to play out.
Just a couple of other items. First, Pat Heller has written an excellent piece called "Where's The Gold?". You should read it: www.coinweek.com/bullion-report/wheres-the-gold/ And, speaking of "where's the gold?", our CBC documentary from back in April is finally set to make its American premiere on Saturday. It will debut on The History Channel known as "H2" and it will be shown at 10:00 pm EDT Saturday night. www.history.com/schedule/h2/7/13/2013
Lastly, I had a 30-minute conversation with Felix Moreno of GoldMoney back on Tuesday. They've now released it as a podcast and I think it turned out pretty well. It's worth a listen, even if I do say so myself.
T. Ferguson: prepare for system failure
That's all for now. I hope you have/had a great day!
TF
http://www.tfmetalsreport.com/blog/4830/why-jpm-hoarding-silver?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TFMetalsReport+%28TF+Metals+Report%29