The New York Fed is the most powerful financial institution you've never heard of. Look who's running it.

By Eliot Spitzer former New York Governor

The kerfuffle about current New York Federal Reserve Bank Chairman Stephen Friedman's purchase of some Goldman stock while the Fed was involved in reviewing major decisions about Goldman's future—well-covered by the Wall Street Journal here and here—raises a fundamental question about Wall Street's corruption. Just as the millions in AIG bonuses obscured the much more significant issue of the $70 billion-plus in conduit payments authorized by the N.Y. Fed to AIG's counterparties, the small issue of Friedman's stock purchase raises very serious issues about the competence and composition of the Federal Reserve of New York, which is the most powerful financial institution most Americans know nothing about.

A quasi-independent, public-private body, the New York Fed is the first among equals of the 12 regional Fed branches. Unlike the Washington Federal Reserve Board of Governors, or the other regional fed branches, the N.Y. Fed is active in the markets virtually every day, changing the critical interest rates that determine the liquidity of the markets and the profitability of banks. And, like the other regional branches, it has boundless power to examine, at will, the books of virtually any banking institution and require that wide-ranging actions be taken—from raising capital to stopping lending—to ensure the stability and soundness of the bank. Over the past year, the New York Fed has been responsible for committing trillions of dollars of taxpayer money to resuscitate the coffers of the banks it oversees.

Given the power of the N.Y. Fed, it is time to ask some very hard questions about its recent performance. The first question to ask is: Who is the New York Fed? Who exactly has been running the show? Yes, we all know that Tim Geithner was the president and CEO of the N.Y. Fed from 2003 until his ascension as treasury secretary. But who chose him for that position, and to whom did he report? The N.Y. Fed president reports to, and is chosen by, the Fed board of directors.

So who selected Geithner back in 2003? Well, the Fed board created a select committee to pick the CEO. This committee included none other than Hank Greenberg, then the chairman of AIG; John Whitehead, a former chairman of Goldman Sachs; Walter Shipley, a former chairman of Chase Manhattan Bank, now JPMorgan Chase; and Pete Peterson, a former chairman of Lehman Bros. It was not a group of typical depositors worried about the security of their savings accounts but rather one whose interest was in preserving a capital structure and way of doing business that cried out for—but did not receive—harsh examination from the N.Y. Fed.

The composition of the New York Fed's board, which supervises the organization and current Chairman Friedman, is equally troubling. The board consists of nine individuals, three chosen by the N.Y. Fed member banks as their own representatives, three chosen by the member banks to represent the public, and three chosen by the national Fed Board of Governors to represent the public. In theory this sounds great: Six board members are "public" representatives.

So whom have the banks chosen to be the public representatives on the board during the past decade, as the crisis developed and unfolded? Dick Fuld, the former chairman of Lehman; Jeff Immelt, the chairman of GE; Gene McGrath, the chairman of Con Edison; Ronay Menschel, the chairwoman of Phipps Houses and also, not insignificantly, the wife of Richard Menschel, a former senior partner at Goldman. Whom did the Board of Governors choose as its public representatives? Steve Friedman, the former chairman of Goldman; Pete Peterson; Jerry Speyer, CEO of real estate giant Tishman Speyer; and Jerry Levin, the former chairman of Time Warner. These were the people who were supposedly representing our interests!

Of course, there have been the occasional nonfinance representatives from academia and labor. But they have been so outnumbered that their presence has done little to alter the direction of the board.

So is it any wonder that the N.Y. Fed has been complicit in the single greatest bailout of poorly managed banks in history? Any wonder that it has given—with virtually no strings attached—practically the entire contents of the Treasury to the very banks whose inability to manage risk has brought our economy to its knees? Any wonder that not a single CEO or senior executive of a major bank has been removed as a condition of hundreds of billions of direct cash and guarantees? Any wonder that, despite its fundamental responsibility to preserve the integrity of the banking system, it sat quietly on the sidelines as the leverage beneath the banks exploded and the capital underlying their investments shrank?

I do not mean to suggest that any of these board members intentionally discharged their duties with the specific goal of benefitting themselves. Rather, what we have seen is disastrous groupthink, a way of looking at the world from the perspective of Wall Street and Wall Street alone. That failure has brought the world economy to the edge of unraveling. And some of Geithner's early missteps betrayed an inability to get beyond this tunnel vision, such as the idea that the banks need to be first in line to be paid and to be paid in full. We can only hope that Geithner, who, to his credit, did try to raise some of the regulatory issues that mattered while he was at the Fed, is no longer in the mental prison of Lower Manhattan and will have more success now that he has a board of one—President Obama.

Perhaps it is time to calculate what these board members have been paid by their banks in salary and bonuses over the years and seek to have them return it to the public as small compensation for their failed oversight of the N.Y. Fed. And more fundamentally, perhaps it is time to take a hard look at the governing structure and supposed independence of this institution that actually controls the use of our tax dollars and, heaven help us, the fate of our economy.

Eliot Spitzer is the former governor of the state of New York

by James Turk

This week Bill Murphy and Chris Powell, co-founders of the Gold Anti-Trust Action Committee (www.gata.org), will be in London, England. Their trip is part of GATA’s ongoing effort to raise awareness of the gold cartel and its surreptitious intervention in the gold market.

Bill and Chris will meet with the British media to explain GATA’s findings. They will also attend an important fund raising event being held in support of GATA’s work. Their trip is another important step by GATA aimed at creating a free market in gold, one which is unfettered by government intervention.

Governments want a low gold price to make national currencies look good. Gold is recognizable the world over as the ‘canary in the coalmine’ when it comes to money. A rising gold price blurts the unpleasant truth that a national currency is being poorly managed and that its purchasing power is being inflated.

This reality is made clear by former Federal Reserve chairman Paul Volcker. Commenting in his memoirs about the soaring gold price in the years immediately following the end of the gold standard in 1971, he notes: “Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake.” It was a mistake because a rising gold price undermines the thin reed upon which all fiat currency rests – confidence. But it was a mistake only from the perspective of a central banker, which is of course at odds with anyone who believes in free markets.

The US government has learned from experience and taken Volcker’s advice. Given the US dollar’s role as the world’s reserve currency, the US government has the most to lose if the market chooses gold over fiat currency and erodes the government’s stranglehold on the monopolistic privilege that it has awarded to itself of creating ‘money’.

So the US government intervenes in the gold market to make the dollar look worthy of being the world’s reserve currency when of course it is not equal to the demands of that esteemed role. The US government does this by trying to keep the gold price low, but this aim is an impossible task. In the end, gold always wins, i.e., its price inevitably climbs higher as fiat currency is debased, which is a reality understood and recognized by government policymakers. So recognizing the futility of capping the gold price, they instead compromise by letting the gold price rise somewhat, say, 15% per annum. In fact, against the dollar, gold is actually up 16.3% p.a. on average for the last eight years. In battlefield terms, the US government is conducting a managed retreat for fiat currency in an attempt to control gold’s advance.

Though it has let the gold price rise, gold has risen by less than it would in a free market because the purchasing power of the dollar continues to be inflated and also because gold remains so undervalued notwithstanding its annual appreciation this decade. These gains started from gold’s historic low valuation in 1999. Gold may not be as good a value as it was in 1999, but it nevertheless remains extremely undervalued.

For example, until the end of the 19th century, approximately 40% of the world’s money supply consisted of gold, and the remaining 60% was national currency. As governments began to usurp the money issuing privilege and intentionally diminish gold’s role, fiat currency’s role expanded by the mid-20th century to approximately 90%. The inflationary policies of the 1960s, particularly in the US, further eroded gold’s role to 2% by the time the last remnants of the gold standard were abandoned in 1971. Gold’s importance rebounded in the 1970s, which caused Volcker to lament the so-called mistakes of policymakers. Its percentage rose to nearly 10% by 1980. But gold’s percent of the world money supply thereafter declined, reaching about 1% in 1999. Today it still remains below 2%.

From this analysis it is reasonable to conclude that gold should comprise at least 10% of the world’s money supply. Because it is nowhere near that level, gold is undervalued.

So given the ongoing dollar debasement being pursued by US policymakers, keeping gold from exploding upward to a true free-market price is the first thing they gain from their interventions in the gold market. The other thing they gain is time. The time they gain enables them to keep their fiat scheme afloat so they can benefit from it, delaying until some future administration the scheme's inevitable collapse.

So how does the US government manage the gold price? They recruit Goldman Sachs, JP Morgan Chase and Deutsche Bank to do it, by executing trades to pursue the US government’s aims. These banks are the gold cartel. I don't believe that there are any other members of the cartel, with the possible exception of Citibank as a junior member. The cartel acts with the implicit backing of the US government to absorb all losses that may be taken by the cartel members as they manage the gold price and further, to provide whatever physical metal is required to execute the cartel's trading strategy. How did the gold cartel come about?

There was an abrupt change in government policy circa 1990. It was introduced by then Federal Reserve chairman Alan Greenspan in order to bail out the banks back then, which like now were insolvent. Taxpayers were already on the hook for hundreds of billions to bail out the collapsed ‘savings & loan’ industry, so adding to this tax burden was untenable. He therefore came up with an alternative.

Greenspan saw the free market as a golden goose with essentially unlimited deep pockets, and more to the point, that these pockets could be picked by the US government using its tremendous weight, namely, its financial resources for timed interventions in the free market combined with its propaganda power by using the media. In short, it was easier to bail out the insolvent banks back then by gouging ill-gained profits from the free markets instead of raising taxes.

Banks generated these profits by the Federal Reserve’s steepening of the yield curve, which kept long-term interest rates relatively high while lowering short-term rates. To earn this wide spread, banks leveraged themselves to borrow short-term and use the proceeds to buy long-term paper. This mismatch of assets and liabilities became known as the carry-trade.

The Japanese yen was a particular favorite to borrow. The Japanese stock market had crashed in 1990, and the Bank of Japan was pursuing a zero interest rate policy to try reviving the Japanese economy. A US bank could borrow Japanese yen for 0.2% and buy US T-notes yielding more than 8%, pocketing the spread, which did wonders for bank profits and rebuilding their capital base.

Gold also became a favorite vehicle to borrow because of its low interest rate. This gold came from central bank coffers, but they refused to disclose how much gold they were lending, making the gold market opaque and ripe for intervention by central bankers making decisions behind closed doors. The amount lent by central banks has been reliably estimated in various analyses published by GATA to be 12,000 to 15,000 tonnes, nearly one-half of central banks total holdings and 4-to-6 times annual new mine production of 2500 tonnes. The banks clearly jumped feet first into the gold carry-trade.

The carry-trade was a gift to the banks from the Federal Reserve, and all was well provided the yen and gold did not rise against the dollar because this mismatch of dollar assets and yen or gold liabilities was not hedged. Alas, both gold and the yen began to strengthen, which if allowed to rise high enough would force marked-to-market losses on those carry-trade positions in the banks. It was a major problem because the losses of the banks could be considerable, given the magnitude of the carry-trade.

So the gold cartel was created to manage the gold price, and all went well at first, given the help it received from the Bank of England in 1999 to sell one-half of its gold holdings. Gold was driven to historic lows, as noted above, but this low gold price created its own problem. Gold became so unbelievably cheap that value hunters around the world recognized the exceptional opportunity it offered, and demand for physical gold began to climb. As demand rose, another more intractable and unforeseen problem arose for the gold cartel.

The gold borrowed from the central banks had been melted down and turned into coins, small bars and monetary jewelry that were acquired by countless individuals around the world. This gold was now in ‘strong hands’, and these gold owners would only part with it at a much higher price. Therefore, where would the gold come from to repay the central banks?

While yen is a fiat currency and can be created out of thin air by the Bank of Japan, gold in contrast is a tangible asset. How could the banks repay all the gold they borrowed without causing the gold price to soar, further worsening the marked-to-market losses on their remaining positions?

In short, the banks were in a predicament. The Federal Reserve’s policies were debasing the dollar, and the ‘canary in the coalmine’ was warning of the loss of purchasing power. So Greenspan's policy of using interventions in the market to bail-out banks morphed yet again.

The gold borrowed from central banks would not be repaid because obtaining the physical gold to repay these loans would cause the gold price to soar. So beginning this decade, the gold cartel would conduct the government’s managed retreat, allowing the gold price to move generally higher in the hope that, basically, people wouldn’t notice. Given its ‘canary in a coalmine’ function, a rising gold price creates demand for gold, and a rapidly rising gold price would worsen the marked-to-market losses of the gold cartel.

So the objective is to allow the gold price to rise around 15% p.a., while at the same time enable the cartel members to intervene in the gold market with implicit government backing in order to earn profits to offset the growing losses on its gold liabilities. Its trading strategy to accomplish this task is clear. The gold cartel reverse engineers the black-box trend-following trading models.

Just look at the losses taken by some of the major commodity trading managers on their gold trading over the last decade. It is hundreds of millions of dollars of client money lost, and gained for the gold cartel to help offset their losses from the gold carry-trade. All to make the dollar look good by keeping the gold price lower than it should be and would be if it were allowed to trade in a market unfettered by government intervention.

There are only two outcomes as I see it. Either the gold cartel will fail in the end, or the US government will have destroyed what remains of the free market in America. I hope it is the former, but the continuing flow of events from Washington, D.C. and the actions of policymakers suggest it could be the latter.

April 28 (Bloomberg) -- Bank of America Corp. Chief Executive Officer Kenneth Lewis lost the support of the largest U.S. pension fund as an analyst said the bank needs as much as $70 billion of capital.

The California Public Employees’ Retirement System said it will vote against Lewis and all 18 directors at the annual meeting tomorrow in the bank’s hometown of Charlotte, North Carolina. The lender needs $60 billion to $70 billion, according to Friedman, Billings, Ramsey Group Inc. analyst Paul Miller, who cited stress tests performed by his firm.

Bank of America should consider converting preferred shares to common stock, including $27 billion in private hands “as soon as possible,” Miller wrote in a note to clients today. Miller said his firm’s versions of the stress tests were “somewhat tougher” than those performed by U.S. regulators...

Comment:

"The recent stock market rally was sparked by encouraging $3 Billion earnings from Citigroup and Bank of America. Less than a month later we learn THEY NOW NEED $70 BILLION???? How long before citizens and the markets wake up and realize what is really going on here. Very soon we will all discover the emperor has no clothes.

Got gold?

The big run up in silver prices yesterday in the thinly traded Asian market and the subsequent Comex session turn around is such a common playbook. With options expiry yesterday JP Morgan et al couldn't let the $13 strike finish in the money so the Comex (sorry CRIMEX) price closed right below that level. Thursday 30th is the first notice day for the May silver futures contract so expect another big take down in price to enable the manipulating investment banks to cover their shorts at the expense of unsuspecting traders who actually believe we have free markets.

Long time silver investors will be well used to this volatility. Newer investors don't be spooked, the price will recover once the notice period has cleared. Silver is technically set up for a big move within 6 months so please hold on.......

For your interest here are the key dates for the next few months. Follow the pump and dump playboook yourself, you will amazed.

April 27 Comex May gold options expiry
April 27 Comex May silver options expiry
April 27 Comex May copper options expiry
April 27 Comex May aluminum options expiry
April 28 Comex April gold futures last trading day
April 28 Comex April silver futures last trading day
April 28 Comex May miNY silver futures last trading day
April 28 Comex April copper futures last trading day
April 28 Comex May miNY copper futures last trading day
April 28 Comex April aluminum futures last trading day
April 28 Nymex April platinum futures last trading day
April 28 Nymex April palladium futures last trading day
April 28 Nymex May Asian gold futures last trading day
April 28 Nymex May Asian platinum futures last trading day
April 28 Nymex May Asian palladium futures last trading day
April 30 Comex May gold futures first notice day
April 30 Comex May silver futures first notice day
April 30 Comex May copper futures first notice day
April 30 Comex May aluminum futures first notice day
April 30 Nymex May platinum futures first notice day
April 30 Nymex May palladium futures first notice day
May 20 Nymex June platinum options expiry
May 26 Comex June gold options expiry
May 26 Comex June silver options expiry
May 26 Comex June copper options expiry
May 26 Comex June aluminum options expiry
May 27 Comex May gold futures last trading day
May 27 Comex June miNY gold futures last trading day
May 27 Comex May silver futures last trading day
May 27 Comex May copper futures last trading day
May 27 Comex June miNY copper futures last trading day
May 27 Comex May aluminum futures last trading day
May 27 Nymex May platinum futures last trading day
May 27 Nymex May palladium futures last trading day
May 27 Nymex June Asian gold futures last trading day
May 27 Nymex June Asian platinum futures last trading day
May 27 Nymex June Asian palladium futures last trading day
May 29 Comex June gold futures first notice day
May 29 Comex June silver futures first notice day
May 29 Comex June copper futures first notice day
May 29 Comex June aluminum futures first notice day
May 29 Nymex June platinum futures first notice day
May 29 Nymex June palladium futures first notice day
June 17 Nymex July platinum options expiry
June 25 Comex July gold options expiry
June 25 Comex July silver options expiry
June 25 Comex July copper options expiry
June 25 Comex July aluminum options expiry
June 26 Comex June gold futures last trading day
June 26 Comex June silver futures last trading day
June 26 Comex July miNY silver futures last trading day
June 26 Comex June copper futures last trading day
June 26 Comex July miNY copper futures last trading day
June 26 Comex June aluminum futures last trading day
June 26 Nymex June platinum futures last trading day
June 26 Nymex June palladium futures last trading day
June 26 Nymex July Asian gold futures last trading day
June 26 Nymex July Asian platinum futures last trading day
June 26 Nymex July Asian palladium futures last trading day
June 30 Comex July gold futures first notice day
June 30 Comex July silver futures first notice day
June 30 Comex July copper futures first notice day
June 30 Comex July aluminum futures first notice day
June 30 Nymex July platinum futures first notice day
June 30 Nymex July palladium futures first notice day
July 15 Nymex August platinum options expiry
July 28 Comex August gold options expiry
July 28 Comex August silver options expiry
July 28 Comex August copper options expiry
July 28 Comex August aluminum options expiry
July 29 Comex July gold futures last trading day
July 29 Comex August miNY gold futures last trading day
July 29 Comex July silver futures last trading day
July 29 Comex July copper futures last trading day
July 29 Comex August miNY copper futures last trading day
July 29 Comex July aluminum futures last trading day
July 29 Nymex July platinum futures last trading day
July 29 Nymex July palladium futures last trading day
July 29 Nymex August Asian gold futures last trading day
July 29 Nymex August Asian platinum futures last trading day
July 29 Nymex August Asian palladium futures last trading day
July 31 Comex August gold futures first notice day
July 31 Comex August silver futures first notice day
July 31 Comex August copper futures first notice day
July 31 Comex August aluminum futures first notice day
July 31 Nymex August platinum futures first notice day
July 31 Nymex August palladium futures first notice day
Aug. 19 Nymex September platinum options expiry
Aug. 26 Comex September gold options expiry
Aug. 26 Comex September silver options expiry
Aug. 26 Comex September copper options expiry
Aug. 26 Comex September aluminum options expiry
Aug. 27 Comex August gold futures last trading day
Aug. 27 Comex August silver futures last trading day
Aug. 27 Comex September miNY silver futures last trading day
Aug. 27 Comex August copper futures last trading day
Aug. 27 Comex September miNY copper futures last trading day
Aug. 27 Comex August aluminum futures last trading day
Aug. 27 Nymex August platinum futures last trading day
Aug. 27 Nymex August palladium futures last trading day
Aug. 27 Nymex September Asian gold futures last trading day
Aug. 27 Nymex September Asian platinum futures last trading day
Aug. 27 Nymex September Asian palladium futures last trading day
Aug. 31 Comex September gold futures first notice day
Aug. 31 Comex September silver futures first notice day
Aug. 31 Comex September copper futures first notice day
Aug. 31 Comex September aluminum futures first notice day
Aug. 31 Nymex September platinum futures first notice day
Aug. 31 Nymex September palladium futures first notice day
Sept. 16 Nymex October platinum options expiry
Sept. 24 Comex October gold options expiry

China Added 454 Tons of Gold to Reserves Since 2003 (Update1)

April 24 (Bloomberg) -- China has added 454 metric tons of gold to its reserves since 2003 through domestic purchases and refining scrap, the official Xinhua News reported, citing Hu Xiaolian, head of the State Administration of Foreign Exchange.

Total gold reserves now stand at 1,054 tons, it said. The country has the world’s biggest foreign-exchange reserves at $1.95 trillion as of March 31, according to data compiled by Bloomberg. The foreign exchange reserves were $286 billion at the end of December 2002.

Got gold?

This is taken from Congressman Mcfadden’s 1934 speech. It explains why only the bankers get the money and all the bankers’ losses and debts are given to the people so as to impoverish all of us first off and then enslave us with higher taxes to pay off the debt incurred when the money was given to the bankers. It explains what Obama will do in the future. This is the blueprint that Bernanke, Geithner and Obama are following.


Roosevelt and the International Bankers

"Roosevelt did what the International Bankers ordered him to do!

"Do not deceive yourself, Mr. Chairman, or permit yourself to be deceived by others into the belief that Roosevelt's dictatorship is in any way intended to benefit the people of the United States: he is preparing to sign on the dotted line! "He is preparing to cancel the war debts by fraud!

"He is preparing to internationalize this Country and to destroy our Constitution itself in order to keep the Fed intact as a money institution for foreigners. "Mr. Chairman, I see no reason why citizens of the United States should be terrorized into surrendering their property to the International Bankers who own and control the Fed. The statement that gold would be taken from its lawful owners if they did not voluntarily surrender it, to private interests, show that there is an anarchist in our Government.

"The statement that it is necessary for the people to give their gold- the only real money- to the banks in order to protect the currency, is a statement of calculated dishonesty!

"By his unlawful usurpation of power on the night of March 5, 1933, and by his proclamation, which in my opinion was in violation of the Constitution of the United States, Roosevelt divorced the currency of the United States from gold, and the United States currency is no longer protected by gold. It is therefore sheer dishonesty to say that the people's gold is needed to protect the currency.

"Roosevelt ordered the people to give their gold to private interests- that is, to banks, and he took control of the banks so that all the gold and gold values in them, or given into them, might be handed over to the predatory International Bankers who own and control the Fed.

"Roosevelt cast his lot with the usurers. "He agreed to save the corrupt and dishonest at the expense of the people of the United States.

"He took advantage of the people's confusion and weariness and spread the dragnet over the United States to capture everything of value that was left in it. He made a great haul for the International Bankers.

"The Prime Minister of England came here for money! He came here to collect cash!

"He came here with Fed Currency and other claims against the Fed which England had bought up in all parts of the world. And he has presented them for redemption in gold.

"Mr. Chairman, I am in favor of compelling the Fed to pay their own debts. I see no reason why the general public should be forced to pay the gambling debts of the International Bankers.

Roosevelt Seizes the Gold

"By his action in closing the banks of the United States, Roosevelt seized the gold value of forty billions or more of bank deposits in the United States banks. Those deposits were deposits of gold values. By his action he has rendered them payable to the depositors in paper only, if payable at all, and the paper money he proposes to pay out to bank depositors and to the people generally in lieu of their hard earned gold values in itself, and being based on nothing into which the people can convert it the said paper money is of negligible value altogether.

"It is the money of slaves, not of free men. If the people of the United States permit it to be imposed upon them at the will of their credit masters, the next step in their downward progress will be their acceptance of orders on company stores for what they eat and wear. Their case will be similar to that of starving coal miners. They, too, will be paid with orders on Company stores for food and clothing, both of indifferent quality and be forced to live in Company-owned houses from which they may be evicted at the drop of a hat. More of them will be forced into conscript labor camps under supervision.

"At noon on the 4th of March, 1933, FDR with his hand on the Bible, took an oath to preserve, protect and defend the Constitution of the U.S. At midnight on the 5th of March, 1933, he confiscated the property of American citizens. He took the currency of the United States standard of value. He repudiated the internal debt of the Government to its own citizens. He destroyed the value of the American dollar. He released, or endeavored to release, the Fed from their contractual liability to redeem Fed currency in gold or lawful money on a parity with gold. He depreciated the value of the national currency.

"The people of the U.S. are now using unredeemable paper slips for money. The Treasury cannot redeem that paper in gold or silver. The gold and silver of the Treasury has unlawfully been given to the corrupt and dishonest Fed. And the Administration has since had the effrontery to raid the country for more gold for the private interests by telling our patriotic citizens that their gold is needed to protect the currency.

"It is not being used to protect the currency! It is being used to protect the corrupt and dishonest Fed. "The directors of these institutions have committed criminal offense against the United States Government, including the offense of making false entries on their books, and the still more serious offense of unlawfully abstracting funds from the United States Treasury! "Roosevelt's gold raid is intended to help them out of the pit they dug for themselves when they gambled away the wealth and savings of the American people.

Dictatorship

"The International Bankers set up a dictatorship here because they wanted a dictator who would protect them. They wanted a dictator who would protect them. They wanted a dictator who would issue a proclamation giving the Fed an absolute and unconditional release from their special currency in gold, or lawful money of any Fed Bank.

"Has Roosevelt relieved any other class of debtors in this country from the necessity of paying their debts? Has he made a proclamation telling the farmers that they need not pay their mortgages? Has he made a proclamation to the effect that mothers of starving children need not pay their milk bills? Has he made a proclamation relieving householders from the necessity of paying rent?

Roosevelt's Two Kinds of Laws

"Not he! He has issued one kind of proclamation only, and that is a proclamation to relieve international bankers and the foreign debtors of the United States Government.

"Mr. Chairman, the gold in the banks of this country belongs to the American people who have paper money contracts for it in the form of national currency. If the Fed cannot keep their contracts with United States citizens to redeem their paper money in gold, or lawful money, then the Fed must be taken over by the United States Government and their officers must be put on trial.

"There must be a day of reckoning. If the Fed have looted the Treasury so that the Treasury cannot redeem the United States currency for which it is liable in gold, then the Fed must be driven out of the Treasury.

"Mr. Chairman, a gold certificate is a warehouse receipt for gold in the Treasury, and the man who has a gold certificate is the actual owner of a corresponding amount of gold stacked in the Treasury subject to his order.

"Now comes Roosevelt who seeks to render the money of the United States worthless by unlawfully declaring that it may No Longer be converted into gold at the will of the holder.

"Roosevelt's next haul for the International Bankers was the reduction in the pay of all Federal employees.

"Next in order are the veterans of all wars, many of whom are aged and inform, and other sick and disabled. These men had their lives adjusted for them by acts of Congress determining the amounts of the pensions, and, while it is meant that every citizen should sacrifice himself for the good of the United States, I see no reason why those poor people, these aged Civil War Veterans and war widows and half-starved veterans of the World War, should be compelled to give up their pensions for the financial benefit of the International vultures who have looted the Treasury, bankrupted the country and traitorously delivered the United States to a foreign foe.

A quick warning for gold investors that April gold option expiry is this Thursday so expect JP Morgan and the Cartel to ensure the price is managed (lots of holders of $900 and $925 calls that need to be fleeced by the Banksters). For calls, there's 7838 open at 900, and 13,287 total between 925 and 900. For puts there's 5134 open at 900 and 8,577 total open between 925 and 900. They are clearly incentivized to keep gold below 925 by Thurs close, but the ideal situation would be a close right at 900. If they can't get either of those done, look out above.

If you are looking to enter gold on the long side it may be a good time to take advantage of the quarterly discount provided by JP Morgan et al.

from Stanford Alumni Magazine

Brooksley Born warned that unchecked trading in the credit market could lead to disaster, but power brokers in Washington ignored her. Now we're all paying the price.

Shortly after she was named to head the Commodity Futures Trading Commission in 1996, Brooksley E. Born was invited to lunch by Federal Reserve chairman Alan Greenspan.

The influential Greenspan was an ardent proponent of unfettered markets. Born was a powerful Washington lawyer with a track record for activist causes. Over lunch, in his private dining room at the stately headquarters of the Fed in Washington, Greenspan probed their differences.

“Well, Brooksley, I guess you and I will never agree about fraud,” Born, in a recent interview, remembers Greenspan saying.

“What is there not to agree on?” Born says she replied.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” she recalls. Greenspan, Born says, believed the market would take care of itself.

For the incoming regulator, the meeting was a wake-up call. “That underscored to me how absolutist Alan was in his opposition to any regulation,” she said in the interview.

Over the next three years, Born, ’61, JD ’64, would learn first-hand the potency of those absolutist views, confronting Greenspan and other powerful figures in the capital over how to regulate Wall Street.

More recently, as analysts sort out the origins of what has become the worst financial crisis since the Great Depression, Born has emerged as a sort of modern-day Cassandra. Some people believe the debacle could have been averted or muted had Greenspan and others followed her advice.

As chairperson of the CFTC, Born advocated reining in the huge and growing market for financial derivatives. Derivatives get their name because the value is derived from fluctuations in, for example, interest rates or foreign exchange. They started out as ways for big corporations and banks to manage their risk across a range of investments. One type of derivative—known as a credit-default swap—has been a key contributor to the economy’s recent unraveling.


FRONT AND CENTER: Born became the first woman at Stanford Law School to be president of the Law Review. In this 1964 photo, she is pictured with senior editors and classmates (back row, from left) Bruce Gitelson, Robert Johnson and Paul Ulrich, and (front row) Richard Roth and James Gaither.
The swaps were sold as a kind of insurance—the insured paid a “premium” as protection in case the creditor defaulted on the loan, and the insurer agreed to cover the losses in exchange for that premium. The credit-default swap market—estimated at more than $45 trillion—helped fuel the mortgage boom, allowing lenders to spread their risk further and further, thus generating more and more loans. But because the swaps are not regulated, no one ensured that the parties were able to pay what they promised. When housing prices crashed, the loans also went south, and the massive debt obligations in the derivatives contracts wiped out banks unable to cover them.

Back in the 1990s, however, Born’s proposal stirred an almost visceral response from other regulators in the Clinton administration, as well as members of Congress and lobbyists. The economy was sailing along, and the growth of derivatives was considered a sign of American innovation and a symbol of the virtues of deregulation. The instruments were also a growing cash cow for the Wall Street firms that peddled them to eager takers.

Ultimately, Greenspan and the other regulators foiled Born’s efforts, and Congress took the extraordinary step of enacting legislation that prohibited her agency from taking any action. Born left government and returned to her private law practice in Washington.

‘History already has shown that Greenspan was wrong about virtually everything, and Brooksley was right. If there is one person we should have listened to, it was Brooksley.’
“History already has shown that Greenspan was wrong about virtually everything, and Brooksley was right,” says Frank Partnoy, a former Wall Street investment banker who is now a professor at the University of San Diego law school. “I think she has been entirely vindicated. . . . If there is one person we should have listened to, it was Brooksley.”

Speaking out for the first time, Born says she takes no pleasure from the turn of events. She says she was just doing her job based on the evidence in front of her. Looking back, she laments what she says was the outsized influence of Wall Street lobbyists on the process, and the refusal of her fellow regulators, especially Greenspan, to discuss even modest reforms. “Recognizing the dangers . . . was not rocket science, but it was contrary to the conventional wisdom and certainly contrary to the economic interests of Wall Street at the moment,” she says.

“I certainly am not pleased with the results,” she adds. “I think the market grew so enormously, with so little oversight and regulation, that it made the financial crisis much deeper and more pervasive than it otherwise would have been.”

Greenspan, who retired from the Fed in 2006, acknowledged in congressional testimony last October that the financial crisis, which he described as a “once in-a-century credit tsunami,” had exposed a “flaw” in his market-based ideology.

He says Born’s characterization of the lunch conversation she recounted does not accurately describe his position on addressing fraud. “This alleged conversation is wholly at variance with my decades-long held view,” he said in an e-mail, citing an excerpt from his 2007 book The Age of Turbulence, in which he wrote that more government involvement was needed to root out fraud. Born stands by her story.

Robert Rubin, who was treasury secretary when Born headed the CFTC, has said that he supported closer scrutiny of financial derivatives but did not believe it politically feasible at the time.

A third regulator opposing Born, Arthur Levitt, who was chairman of the Securities Exchange Commission, says he also now wishes more had been done. “I think it is fair to say that regulators should have considered the implications . . . of the exploding derivatives market,” Levitt told STANFORD.

In a way, the battle had the look and feel of a classic Washington turf war.

The CFTC was created in the ’70s to regulate agricultural commodities markets. By the ’90s, its main business had become overseeing financial products such as stock index futures and currency options, but some in Washington thought it should stick to pork bellies and soybeans. Born’s push for regulation posed a threat to the authority of more established cops on the beat.

“She certainly was not in their league in terms of prominence and stature,” says a lawyer who has known Born for years and requested anonymity to avoid appearing critical of her. “They probably thought, ‘Here is a little person from one of these agencies trying to assertively expand her jurisdiction.’”

Some of the other regulators have said they had problems with Born’s personal style and found her hard to work with. “I thought it was counterproductive. If you want to move forward . . . you engage with parties in a constructive way,” Rubin told the Washington Post. “My recollection was . . . this was done in a more strident way.” Levitt says Born was “characterized as being abrasive.”

Her supporters, while acknowledging that Born can be uncompromising when she believes she is right, say those are excuses of people who simply did not want to hear what she had to say.

“She was serious, professional, and she held her ground against those who were not sympathetic to her position,” says Michael Greenberger, a Washington lawyer who was a top aide to Born at the CFTC. “I don’t think that the failure to be ‘charming’ should be translated into a depiction of stridency.”

Others find a whiff of sexism in the pushback. “The messenger wore a skirt,” says Marna Tucker, a Washington lawyer and a longtime friend of Born. “Could Alan Greenspan take that?”

Greenspan dismisses the notion that he had problems with Born because she is a woman. He points out that when he took a leave from his consulting firm in the 1970s to accept a job in the Ford administration, he placed an all-female executive team in charge.

It was not the first time that Born, 68, had pushed back against convention.

Her doggedness over a career spanning more than 40 years propelled her into the halls of power in Washington. She was a top commercial lawyer at a major firm, as well as a towering figure in the area of women’s rights, and a role model for women lawyers. She was on Bill Clinton’s short list for attorney general.

One of seven women in the Class of 1964 at Stanford Law School, she graduated at the top of her class, and was elected president of the law review, the first woman to hold either distinction. She is credited with being the first woman to edit a major American law review.

In the early 1970s, at a time when women had few role models at major law firms, she became a partner at the Washington, D.C., firm of Arnold & Porter, despite working part time while raising her children.

She helped establish some of the first public-interest firms in the country focused on issues of gender discrimination. She helped rewrite American Bar Association rules that made it possible for more women and minorities to sit on the federal bench, and she prodded the group into taking stands against private clubs that discriminated against women or blacks.

She was used to people trying to push her around, or being perceived as a potential troublemaker. She remembers being shouted down during an ABA meeting in the 1970s when she proposed that the organization take a position supporting equal rights for gay and lesbian workers. A former ABA president stood up and said, “that the subject was so unsavory that it should not be discussed . . . and was not germane to the purposes of the ABA,” she recalls. She lost that fight, although the group reversed its stand years later.

“She looks at things not just from a technical perspective or the perspective of an insider. She looks at the perspective of outsiders and how people without power are going to be affected,” says Esther Lardent, a Washington lawyer who worked with Born on various ABA matters. “That is a theme constantly running through her life and career.”

“She is a very polite and low-key person but she is never somebody who steps back from a disagreement or a fight if it is a matter of importance to her,” Lardent adds. “Did that make people uncomfortable? Did that make the men who dominated the leadership fail to take her seriously enough? I am sure that was the case.”

SHE WAS BORN in San Francisco. Her mother, an English teacher, and her father, the head of the city’s public welfare department, were both Stanford graduates.

An early mentor was her mother’s best friend from Stanford, Miriam E. Wolff, JD ’40, who became a deputy state attorney general and judge and the first woman to ever head a major port.

Born entered Stanford with the thought of being a doctor, but switched majors after a career counselor interpreted her answers on a series of vocational tests. In those days, women were assessed for their interest in nursing or teaching, men for the professional jobs, including law and medicine. The tests were even color coded—pink for women, blue for men.

Born says she insisted on taking both. Her mother, who had a master’s degree in psychology, felt that was the only way her daughter’s professional interests could be evaluated properly.

She scored high on being a doctor—and low on being a nurse. But rather than suggest she pursue a career as a physician, the counselor said the test proved that her interest in medicine was not genuine and that she was really only interested in making a lot of money. Born quit premed and majored in English.

“It was a turning point. What can I say? I was 18 years old. I didn’t know any better,” Born says. “Unfortunately, I was, you know, a member of the society as it was then. I was hurt by the advice, and kind of believed in it. I don’t believe in it now. It is ridiculous in retrospect.”

A decade later, one of the public-interest firms she founded challenged the tests as discriminatory.

Law school was welcoming and intellectually stimulating, even if some people were still getting used to the idea of having women around. Male law students got their own dormitory; women were left to make their own housing arrangements in off-campus boarding houses or apartments. “I also had . . . one student in my class tell me I was taking the place of a man who had to go to Vietnam and was risking his life because of me, which was sobering to say the least,” she recalls.

Making a mark in the classroom could also be a challenge. Some professors refused to call on women, thinking it rude or unbecoming. She remembers an episode in her first year when her professor appeared to have the class stumped after quizzing several men about a problem. “The little girl has it!” she recalls the professor declaring, after she blurted out the right answer.

“I was very worried that I would not do well and that I would disgrace myself, and women,” Born says. “I worked very hard during my first year because I was afraid I would flunk out.” In those Darwinian times in law schools, that was not an idle concern: professors tried to weed out all but the most qualified students, and about a third were dismissed from school after the first year. That would not be her fate.

“She was off the charts,” says Pamela Ann Rymer, JD ’64, a judge on the federal appeals court in Pasadena. “Brooksley never wore it on her sleeve. She is not quiet, but she is a very unpretentious kind of person, just plainly and obviously with a brilliant mind.”

Despite her grades, Born was passed over for a clerkship on the U.S. Supreme Court, the most coveted opportunity for a young lawyer. Stanford’s top students were good candidates for the clerkships, but a faculty committee decided to recommend two men for the positions even though Born had a superior academic record. It was a bitter introduction to a gender-biased legal culture. “They were sure I would understand that it would be unseemly for women to be clerks on the Supreme Court,” she says of the committee members. “I felt very disappointed and angry.”

Undaunted, she headed to Washington, and arranged an interview on her own with Arthur Goldberg, then one of the most liberal members of the high court. Goldberg would not hire her either but recommended her to a judge on the federal appeals court in Washington. Henry Edgerton, who wrote an opinion that became a basis for the landmark Supreme Court decision in the Brown v. Board of Education school desegregation case, gave her a clerkship. (Law school professor emerita Barbara Babcock also clerked for Edgerton.)

A year later, taken with the Washington scene and its place on the front lines of the civil rights movement, Born scrapped plans to return to San Francisco. “I wanted in,” she says. Arnold & Porter, a firm with a liberal tradition of public service, offered her a job, and she started work the same day that a former name partner of the firm, Abe Fortas, was sworn in as a justice of the Supreme Court.

The firm was one of a few that were beginning to hire women and treat them on par with men. But there were challenges, especially for those interested in a career and a family. Many firms up to that point refused to hire women who were married or who were interested in children.

The lone woman partner at Arnold & Porter at the time was married to Fortas and was renowned for her “misanthropic toughness,” including a preference for “thick cigars,” according to Charles Halpern, an associate with Born at the firm in the 1960s. “Our swimming pool has two deep ends,” Halpern recalls her once saying, “so that people aren’t tempted to drop by with their small children for a swim on a hot summer day.”

Born soon faced a difficult choice. She took a one-year leave when her then-husband got a Nieman fellowship at Harvard, where her first child was born. Returning to Washington, she tried to juggle full-time work and child rearing but it quickly became apparent that the arrangement didn’t work.

“I went to the partner I was working with the most and said I just didn’t think I could do this,” she says. “I thought I had to resign.” To her surprise, the partner suggested she work three days a week with the understanding she would not be considered for partner until she returned full time.

In 1974, when she had a 4-year-old and a 2-year-old, she was still working part time. The firm promoted her anyway. The family-friendly development was a stunning breakthrough at a time when law firms were focused on billable hours and the bottom line, and little else. It further raised her profile.

“When I met her I was in awe of her because the idea that she could be a partner in that firm was just unbelievable,” says Tucker, her longtime friend. The women bonded after being asked to teach a course on women and the law at two Washington-area law schools, and being horrified at what they found during their research. “We were surprised to find the degree to which discrimination was embodied in the law,” Born says. “It was a real consciousness-raising experience.”

Lawyer Marcia Greenberger sought out Born in the 1970s when she was named to start a new women’s rights project in Washington. Born agreed to chair an advisory board for the project, and became a guiding force, mentor and opener of doors, leveraging her contacts and credibility, Greenberger says. One of the first broad-based challenges to how universities were implementing Title IX—the 1972 law requiring equal programs and activities for women and men—was brought after Born passed along the name of a colleague who was incensed at the poor athletic facilities his daughter was forced to use at her school. Born also helped win Ford Foundation grants that enabled the project to hire its second lawyer. What is now called the National Women’s Law Center today has a staff approaching 60 and a budget of almost $10 million. Born remains chair of its board of directors.

Clinton named her to head the CFTC in 1996. She was not without experience: at Arnold & Porter she had represented the London Futures Exchange in rule making and other matters before the commodities agency.

She also knew how markets could be manipulated, having represented a major Swiss bank in litigation stemming from an attempt by the Hunt family of Dallas to corner the silver market in the 1980s.

“Brooksley had the advantage of knowing the law and understanding the fragility of the system if it weren’t regulated,” says Michael Greenberger, her former adviser at the CFTC. “She could see that the data points, by lack of regulation, were heading the country into a serious set of calamities, each calamity worse than the one before.”

Under a Republican predecessor, the CFTC had in 1993 largely exempted from regulation more exotic derivatives that involved just two parties. The thinking was that sophisticated entities negotiating individually tailored derivatives could look out for themselves. More generic derivatives still had to be traded on exchanges, which were subject to regulation.

By 1997, the over-the-counter derivatives market had more than doubled in size, by one measure, reaching an estimated $28 trillion, based on the value of the instruments underlying the contracts. (It has now reached an estimated $600 trillion.)

And some cracks were already surfacing in the landscape. Several customers of Bankers Trust, including Procter & Gamble, sued for fraud and racketeering in connection with several OTC derivative deals. Orange County, Calif., had gone bankrupt in part because of an OTC derivative-trading scheme gone awry.

What is more, all the growth had taken place at a time of economic prosperity. Some people were beginning to ask what would happen if the market suffered a major reversal.

“The exposures were very, very big and if it was your job to worry about things that could go wrong, and I think it was, this is one of the things you couldn’t help but notice,” says Daniel Waldman, a Washington lawyer who was the CFTC general counsel under Born. “It was only your blind faith in the participants that could give you much comfort because you really did not know much about the real risks.”

‘There was no transparency of these markets at all. No market oversight. No regulator knew what was happening,” Born says. “There was no reporting to anybody.’
“There was no transparency of these markets at all. No market oversight. No regulator knew what was happening,” Born says. “There was no reporting to anybody.”

She chose what she thought was a middle ground, circulating a draft “concept release,” to regulators and trade associations, which was intended to gather information about how the markets operated. She and her staff suspected the industry was trying to exploit the earlier regulatory exemption.

But even the modest proposal got a vituperative response. The dozen or so large banks that wrote most of the OTC derivative contracts saw the move as a threat to a major profit center. Greenspan and his deregulation-minded brain trust saw no need to upset the status quo. The sheer act of contemplating regulation, they maintained, would cause widespread chaos in markets around the world.

“We would go to conferences and it would be viciously attacked,” Waldman says. “They would just be stomping their feet and pounding the tables.” With Born unlikely to change her mind, the industry focused on working through the other regulators.

Born recalls taking a phone call from Lawrence Summers, then Rubin’s top deputy at the Treasury Department, complaining about the proposal, and mentioning that he was taking heat from industry lobbyists. She was not dissuaded. “Of course, we were an independent regulatory agency,” she says.

The debate came to a head April 21, 1998. In a Treasury Department meeting of a presidential working group that included Born and the other top regulators, Greenspan and Rubin took turns attempting to change her mind. Rubin took the lead, she recalls.

“I was told by the secretary of the treasury that the CFTC had no jurisdiction, and for that reason and that reason alone, we should not go forward,” Born says. “I told him . . . that I had never heard anyone assert that we didn’t have statutory jurisdiction . . . and I would be happy to see the legal analysis he was basing his position on.”

She says she was never supplied one. “They didn’t have one because it was not a legitimate legal position,” she says.

Greenspan followed. “He maintained that merely inquiring about the field would drive important and expanding and creative financial business offshore,” she says. CFTC economists later checked for any signs of that, and came up with no evidence, Born says.

“It seemed totally inexplicable to me,” Born says of the seeming disinterest her counterparts showed in how the markets were operating. “It was as though the other financial regulators were saying, ‘We don’t want to know.’”

She formally launched the proposal on May 7, and within hours, Greenspan, Rubin and Levitt issued a joint statement condemning Born and the CFTC, expressing “grave concern about this action and its possible consequences.” They announced a plan to ask for legislation to stop the CFTC in its tracks.

At congressional hearings that summer, Greenspan and others warned of dire consequences; Born and the CFTC were cast as a loose cannon.

Reverting to a theme Born claims he raised at their earlier lunch, Greenspan testified there was no need for government oversight, because the derivatives market involved Wall Street “professionals” who could patrol themselves.

Summers, Rubin’s deputy (and now director of the National Economic Council), said the memo had “cast the shadow of regulatory uncertainty over an otherwise thriving market, raising risks for the stability and competitiveness of American derivative trading.”

Born assailed the legislation, calling it an unprecedented move to undermine the independence of a federal agency. In eerily prescient testimony, she warned of potentially disastrous and widespread consequences for the public. “Losses resulting from misuse of OTC derivatives instruments or from sales practice abuses in the OTC derivatives market can affect many Americans,” she testified that July. “Many of us have interests in the corporations, mutual funds, pension funds, insurance companies, municipalities and other entities trading in these instruments.”

That September, seemingly bolstering her case, the Federal Reserve Bank of New York was forced to organize a rescue of a large private investment firm, Long Term Capital Management, which was a big player in the OTC derivatives market. Fed officials said they acted to avoid a meltdown that could have impacted the wider economy.

But the tide of opinion that had risen up against Born was irreversible. Language was slipped into an agriculture appropriations bill barring the CFTC from taking action in the six months left in her term.

“I felt as though that, at least, relieved me and the commission of any public responsibility for what was happening,” she says. Clinton aides sounded her out about a second term, but she said she wasn’t interested and left the agency in June 1999.

A year later, Congress enacted the Commodity Futures Modernization Act, which effectively gutted the ability of the CFTC to regulate OTC derivatives. With no other agency picking up the slack, the market grew, unchecked.

Some observers say now the episode and infighting showed how even a decade ago a patchwork system of regulating Wall Street was badly in need of reform.

“The fact that the . . . issue created such a threat to the marketplace to me confirmed the fact that something was not right,” says Richard Miller, a lawyer and editor of a widely read newsletter on derivatives. “How could we have a system that hangs together by such a narrow thread?” Miller testified at the time that the idea Born proffered should at least have been considered.

The Obama administration has pledged an overhaul of the financial system, including the way derivatives are regulated. Worrisome to some observers is the fact that his economic team includes some former Treasury officials who were lined up in opposition to Born a decade ago.

Born, who retired from her law firm in 2003, is not playing a formal role in the process. An outdoor enthusiast, she was planning a trip to Antarctica this winter, as the Obama team was settling in. “The important thing,” she advises, “is that the new administration should not be listening to just one point of view.”

by Dave Kranzler

Given that the stated amount of gold in the GLD Trust has grown to over 850 tonnes, it appears that a lot of investors believe that investing in GLD is the same thing as buying physical gold bullion."

There may be many things to hope for in the oncoming Obama administration. Investing in the bullion ETF, GLD, is not one of them.

1. I'll start with the opening sentence of the gold ETF itself and work outwards to you. The opening sentence of the November 2004 gold ETF prospectus said, "This ETF is intended to track the performance of the price of gold." Note that it doesn't say it will own gold, or anything so prosaic. This Exchange Traded Fund that promises easy gold ownership for America is only going to track it. You know, like your cat tracking a crow in the back yard. And if GLD or your cat never quite gets there, well, it was an interesting exercise.

A careful reading of the first sentence should tell you that this is a document written by lawyers, and it is intended to be read by other lawyers who might be thinking of suing the guys represented by the first group of lawyers. The opening sentence is nothing if not defensible.

2. GLD Share Price: The current price of the ETF is said to be 1/10 of the price of gold. Yet, GLD's price is usually below the actual price of gold even as priced on the COMEX. Well, when GLD sells new shares that's the amount of money they get to buy gold. And they buy ounces of gold with it. This means that somehow, by some secret method, the guys managing a gold bullion ETF, while always behind the market, manage to pick up tonnes of gold at a discount to the COMEX price. This is not possible. The gold market is global and operates 24/7 all over the planet. If gold is under priced somewhere, it will be arbitraged like a Tonya Harding knee chop.

Think about it. Gold is currently very difficult to find under the earth. It's tough to mine profitably, much less mill and smelt, and insure, transport and store. Why would anybody be selling a bar of gold even near or below the price of an historically suspect pricing mechanism like the NY COMEX? Why is there no premium on these shares? The Central Fund of Canada (CEF) trades at a premium, but then, it goes to some lengths to actually buy and own gold bullion.

Only if there's some other "form" of gold being purchased, such as a derivative "promising" to deliver gold, can the pricing mismatch begin to be explained. (See #9 below, Jim Turk says there are only gold "deposits" involved here. And Jim Sinclair says gold derivatives are being used.)

Or perhaps the disparity of price could have to do with the shorting of GLD shares by those nefarious short sellers. With shorted shares, at the very least, you have two potential claims to ownership to a GLD share. If the shares were shorted naked, who knows how many claimants there could be. Want to go there?

3. Gold Acquisition: Then there's the amount of alleged gold acquired for GLD per se. Many sources, including the World Gold Council, the Sponsor of the ETF, have noted that the quantity of gold mined the past four years has plateaued somewhere below 2500 tonnes a year. Divide even that optimistic 2500 tonne number by 52 weeks a year, and you get about 48 tonnes of global gold production per week.

Yet, somehow, during the first two weeks of February, 2009, for instance, GLD said it acquired almost 103 tonnes of gold, more gold than was mined in the entire world during that two week period. (Don't ask about getting gold from above ground stocks. Do you think that owners of large piles of gold are selling these days?) GLD's purchases apparently left zilch gold for all those other gold bullion ETFs - the IAU in the U.S., and the British, Swiss, Indian and Australian gold ETFs in their respective countries.

These plentiful purchases of GLD occurred smoothly and instantly despite London Metal Exchange buyers, mining shortfalls, South African power failures, the dental profession, manufacturing, and even Central Bank buying. And GLD did all this buying without kicking up the price unduly?

India, which has been buying more than 25% of the gold coming out of the ground for years (said to be some 15 tonnes a week) apparently got none.

The OPEC countries, that have been buying a lot of gold through Istanbul, apparently didn't get any gold those weeks either.

And the jewelry industry, which supposedly absorbs over 70% of the gold mined each year, apparently surrendered its purchasing for the first two weeks in February so that ONE American bullion ETF could buy all the gold available.

Ever heard of a guy named Tino DeAngelis? Back in the 1960s, he said he had a lot of salad oil...and didn't. If you believed in Tino, and you believe in the GLD purchasing prowess, then you probably also believe in financial tooth fairies.

4. The Legal Structure of GLD. Who are these guys?

A. There is a Sponsor of the ETF - the World Gold Trust Services, a subsidiary of the World Gold Council in London.

B. There is a Trustee subsidiary that holds title to the bullion and issues shares - The Bank of New York (BK).

C. There is one listed Custodian - HSBC (HBC), and provision for one or dozens of "sub" custodians, Great, if something goes wrong, first you've got to find where which custodian allegedly had it. And while the custodian is charged with a duty of due care in hiring the subs, there's no assurance the subs won't screw up afterwards and there's no real recourse if a sub does. Which brings up...

D. There is a marketing agent, for the shares - State Street Global Agents, a separate creation of State Street Bank (STT) in Boston, but they really don't answer anybody's questions. GLD is considered a "permanent offering" and the aforementioned marketing team can say nothing about anything during a permanent "quiet period." This ETF took two years to get through the SEC...And I'm not sure it didn't get the benefit of grade inflation on the SEC view of crookedness as it went along. "Hey," the SEC said, "This ETF isn't absolutely, totally rotten on its face, let it go through. At least it's not a CDO. Hah, hah."

Each of these outfits have created separate subsidiary corporations to provide more limitation of liability for the parent. There were marvelous waffle words, and exemptions from legal liability for even these subsidiary players in the original S1 prospectus, filed on November 15, 2004. These have been carried forward and even improved upon. See the prospectus.

5. Sub Custodian Shenanigans: Assuming GLD managed to find some gold and buy it, and some sub custodian somewhere got possession of it, there's nothing in the legal structure that prohibits the sub from leasing or even selling that gold and putting an IOU in the vault claiming it still owns it. Central Banks and the IMF have been shuffling these cards for decades.

The Bank of England is listed as a sub custodian. Other sub custodians are the Bank of Nova Scotia (BNS) (ScotiaMocatta), Deutsche Bank AG (DB), JPMorgan Chase Bank (JPM), and UBS AG (UBS) (Page 47). All are known to actively lease or otherwise trade in the gold markets. I.e., I believe that investors should assume that there will be trading or leasing of GLD assets,

When the gold bull market ran out of gas back the early 1980s a lot of allegedly respectable gold dealers who claimed to be storing gold for their customers, fessed up and said they didn't have it, and went broke.

On June 12, 2007, Morgan Stanley announced it had settled a case wherein a Mr. Silberblatt was charged for storage and insurance on silver that Morgan had never bought. And Morgan claimed in its defense that its "practices" were the "industry standard."

Such disreputable practices occur in most precious metals areas with great regularity. You really ought to consider deep therapy if you believe the promises of a financial institution these days if it's talking about gold. Hell, if it's stonewalled and fibbed to Congress, regulators, auditors and the media about almost everything, why wouldn't it lie about gold? (That's a rhetorical question.)

6. "Regulation" of the ETF: After the Fed's failure to regulate much of anything, the SEC's treatment of Bernie Madoff, and its elimination of leverage maximums for brokers, the NYSE killing of the NYSE Uptick Rule and circuit breakers, and bank regulators' encouragement of cheating at Countrywide, I barely see the point of mentioning regulation. There is NO adult supervision of financial guys. Customers are absolutely on their own.

Oh, ok, the Trustee can monitor the custodian "up to twice" a year (Page 37 of the prospectus). Oh, the ignominy of a visit from an official every six months. And there's no mention of what will happen if an inspecting official finds some wrongdoing. Probably just drop a note in a file. The Trustee apparently does not have the right to visit the premises of any sub custodian for the purposes of examining the actual gold, but only to visit to look at records maintained by the sub custodian. And no sub custodian is obligated to cooperate in any such review.

Finally, the prospectus clearly states that the auditor's “responsibility is to express an opinion on the Trust’s internal control over financial reporting.” Boy, that makes me feel better. Their processes are good.

7. If Things Do Go Wrong: If the Sponsor, Trustee, Custodian, Sub custodian, or Marketing Agent folks fall over, they'll have high priced lawyers defending them everywhere. (Bankruptcy is not a totally unlikely scenario, considering the recent performance of Bear Stearns, AIG, Lehman Brothers, CitiGroup, Fannie Mae, etc.) Well, since the prospectus excuses all sorts of GLD malfeasance, non-feasance, negligence, and probably even manslaughter, customers would - at best - wind up as general creditors of a GLD party. And investors will be far down the list of creditors behind bank lenders, bondholders, preferred shareholders, and common stockholders. Have you considered Lottery tickets for your retirement?

Oh, and there may be a few delays and costs involved...in the bankruptcy filing of a giant financial institution with claimants from all over the planet. And I doubt if specific performance is available to claimants in a bankruptcy proceeding to help people get the actual gold they thought they'd bought. Wasn't gold ownership supposed to be for safety without counter party risk?

And this is an American ETF, yet most of the custodians are British, European, or Canadian. Eh? It will be difficult to sue them in U.S. Courts, and it will be expensive to sue overseas. What, there weren't any suitable sub custodians available in the U.S.? I hear Fort Knox is mostly empty, maybe the ETF could store its alleged gold there.

Also, there is no requirement that the Trustee, Custodian or sub custodians carry insurance or even a surety bond with respect to gold. (Page 11). So even if a liability is found...there probably won't be any deep insurance pocket money.

In summary, the GLD prospectus is a steaming pile of legal loopholes. Only a lazy mutual fund manager or a brain-dead pension fund manager would touch this turkey. It's also likely that retail investors, and their highly compensated advisors, are even remotely aware of the astounding risks declared in the ignored GLD trust documents.

8. There are other GLD critics, besides the Financial Foghorn here, who think that the gold ETF is untrustworthy. Dave Kranzler, from whom much of this dissertation has been respectfully purloined, has obviously analyzed the prospectus carefully and found it wanting.

James Turk, a former money manager for the Saudi Arabian Central Bank, long time precious metals market analyst, and the founder of www.goldMoney.com, has been critical of GLD since it was proposed in 2004. And he recently noted that the August, 2008 GLD updated prospectus, on page 3, says: "Proceeds received by the Trust from the issuance and sale of Baskets consist of gold deposits and, possibly from time to time, cash." A "gold deposit" is a word that has a precise meaning in the law, and is the exact opposite of "bailment".

A bailment is what happens when you give your car to valet parking. When you present the ticket, you get your very own car back. With a "deposit," a bank gives you a certificate of deposit, a checking account statement, a savings book or some other evidence of its debt to you. You are no longer entitled to get your very own dollars back, but have become a depositor and general creditor of the bank. Title/ownership has transferred from you to the bank, and the bank can do whatever it wants with your former dollars.

It is extremely unlikely that a highly paid passel of lawyers that worked over the GLD prospectus would offhandedly put in a word like "deposit" unless there was a good avoidance-of-liability reason to do so. If physical gold were actually in the ETF, the above statement would have read: "Proceeds received by the Trust from the issuance and sale of share baskets consist of gold (or gold bailments) and, possibly from time to time, cash."

Turk's point, and Kranzler's reference, is that "gold" is one thing and a "gold deposit" is something entirely different. "Gold" is physical metal stored/bailed in a secure vault. A "gold deposit" is a liability of a financial institution, and it's just another lousy paper gold IOU. Whoops.

Jim Sinclair has chimed in with his opinion on these issues at www.jsmineset.com. He says that the only thing GLD owns is derivatives on gold, and that allows for much game playing to fool the rubes.

9. But can you actually get real gold from GLD? Yes, Virginia, there is a provision in the prospectus for obtaining possession of the gold bullion your shares represent. Unfortunately, it's a cruel hoax. You must own a minimum of 100,000 shares (I believe it used to be 50,000 shares under the 2004 prospectus) to claim your bullion. Hmmm, 100,000 times $90 or so a share would be $9 million. Think the little guy is gonna put in for any actual gold? Think the mutual fund guy is gonna go to his boss and say he wants to take delivery of 10,000 ounces of gold? That's 833 pounds of gold. "Delivered here?" "Gonna put that in the conference room, Tom?"

10. So why do these gold and silver ETFs even exist?

My belief is that the real purpose of a bullion ETF is to be a sacrificial lamb. The growing number of gold and silver ETFs around the world will indeed accumulate some gold and silver, and under some Executive Order down the road, Da Boyz will swoop down and take it, just like 1933. They'll need the gold to back their spanking new, Global, Electronic, All-Beef currency. An ETF seizure will be much easier than going bank box to bank box to get citizens' gold.

Given the citizens' restiveness these days, it isn't hard to predict that it will be slightly more difficult in the 21st century to convince citizens to turn in gold than it was back in 1933. Our current politicos appear to have dissipated some of the trust people have traditionally had for their elected Representatives. (Insert your favorite, dastardly Congress-person examples here...)

And as far as legalities are concerned, the government will indeed comply with the 5th Amendment Taking-with-Due-Process issue by paying the investors for the value of gold on the day they seized it.

But that will be a far cry from the price of gold the day AFTER they seize it. The day after an ETF seizure, the world will realize that the paper jig is up, and everybody will want to own physical gold, or a real gold mining company. Why not do that now?

Nine points of logic and reason:

1. This article is totally correct in saying nothing whatsoever has been done about the basic problem which is the failure of the OTC derivative. As long as the basic problem is not addressed by true valuation and bankruptcy of the friends of Washington all attempts to whitewash the disaster will in a short time wash away.
2. The problem is how to value the failed OTC derivative properly because we can't use the "zero" word.
3. Because of #2 the US Treasury will guarantee a false value.
4. Since the majority of SIVs will never perform due to bankruptcy in the asset chain, the US government will have to guarantee these at 100% of whatever value they intend to raise money on.
5. Next, the US treasury will have to guarantee and/or provide 100% of the funds borrowed or raised to make this worthless unless guaranteed investment in a pile of miss-valued worthless SIV paper.
6. Yielding the plan as it is now conceived is a useless camouflage of bankruptcy to be paid in via guarantee by the US taxpayer.
7. We need no Bad Bank as we already have a really BAD one called the Federal Reserve. It is stuffed to its own bankruptcy level with all their financial pal's OTC derivatives, also called toxic paper.
8. The majority of dopes and all the financial media will praise this outstanding job of window dressing and whitewash painting as solid accomplishment at last.
9. The media will have done a solid job instructing you that Toxic Paper is the villain, not those that manufactured the toxic paper OTC derivatives and distributed them, now having been bailed out 100% at your personal expense
This is all a Devil's financial brew being moiled and boiled daily in hopes of keeping you all firmly intoxicated.

Geithner to Draw Private Funds to Address Toxic Debt

Feb. 9 (Bloomberg) -- Treasury Secretary Timothy Geithner is seeking to draw investors into the U.S. financial-rescue program, aiming to add private funding as a new component of proposals to address the toxic debt clogging banks' balance sheets.

Aides worked through the weekend to complete the package that Geithner will announce tomorrow in Washington, which was delayed by a day. Aspects of the plan that have been settled include a new round of injections of taxpayer funds into banks, targeted at those identified by regulators as most in need of new capital, people briefed on the matter said.

The toughest issue has been the one Geithner's predecessor failed to address: the illiquid assets that caused the credit crunch. A leading proposal is a so-called aggregator bank, featuring investors such as hedge funds and private equity, that may issue Federal Deposit Insurance Corp.-backed debt, the people said. It's unclear how big a role there'll be for guarantees of securities that stay on banks' balance sheets.

"We have to reach a point where investors and consumers have greater confidence in our financial system," Philadelphia Federal Reserve Bank President Charles Plosser said in an interview. "Without that, these institutions will not be able to attract new capital or be able to fully resume their important role in providing credit."

Stocks flucuated, with the Standard & Poor's 500 Stock Index rising 0.5 percent to 873.20 at 1:03 p.m. in New York. Treasuries slid, pushing 10-year note yields up to 3.05 percent from 2.99 percent.

from truth in options
As readers will recall, J.P. Morgan received the first large bail-out from the New York FED of $55 Billion, guaranteed by Bear Stearns' worthless assets, to prop up its own liquidity position and buy Bear Stearns stock.

J.P. Morgan also recently received another $25 Billion in TARP payments from the Treasury.

This article is about how J.P. Morgan's executives , instead of receiving easy to detect cash bonuses, received very large bonuses in the form of Stock Appreciation Rights (SARs) and Restricted Stock Units. These equity compensation securities are not easy to understand or value by other than experts in the field.

SARs are very similar to employee stock options and Restricted Stock Units are very similar to Restricted Stock.

These SARs were granted on January 20, 2009, the day that the J.P.Morgan stock reached its lowest in five years. The stock quickly rebounded as illustrated in the graph below. The arrow indicates the day and the price of the stock when the grant was made.

On January 22, 2008 we see a repetition of the grants of SARs with the stock hitting a low point followed by a substantial rebound in the next days.





Let's examine the size of the bonuses of the top 15 executives, at J.P. Morgan, that were granted on January, 20, 2009 and reported two days later.

See the link below:

http://www.secform4.com/insider-trading/19617.htm


Stock Appreciation Rights Granted

SARs Amounts Name of Exercise Value 2/4/09
Granted Grantee Price

700,000 Winters 19.49 $11,300,000
700,000 Black 19.49 $11,300,000
500,000 Staley 19.49 $8,100,000
300,000 Scharf 19.49 $4,890,000
250,000 Drew 19.49 $4,075,000
200,000 Miller 19.49 $3,260,000
200,000 Rauchenberger 19.49 $3,260,000
200,000 Smith 19.49 $3,260,000
200,000 Zubrow 19.49 $3,260,000
200,000 Bisignano 19.49 $3,260,000
200,000 Mandelbaum 19.49 $3,260,000
200,000 Cavanaugh 19.49 $3,260,000
200,000 Cutler 19.49 $3,260,000
200,000 Maclin 19.49 $3,260,000
100,000 Daley 19.49 $1,630,000
----------------------------------------------------------------------------------------
Total value (2/6/09) of SARs Granted = $81,405,000




Restricted Stock Units Granted

RSUs Amounts Name of Market Value SARS Value
Granted Grantee of stock 2/4/09

115,474 Staley 24.10 $2,782,923
102,644 Miller 24.10 $2,473,720
102,644 Scharf 24.10 $2,473,720
102,644 Smith 24.10 $2,473,720
102,644 Bisignano 24.10 $2,473,720
102,644 Cavanaugh 24.10 $2,473,720
102,644 Drew 24.10 $2,473,720
102,644 Maclin 24.10 $2,473,720
89,813 Zubrow 24.10 $2,164,493
89,813 Cutler 24.10 $2,164,493
59,662 Daley 24.10 $1,364,542
35,926 Rauchenberger 24.10 $865,816
--------------------------------------------------------------------------------------------------
Total value (2/6/09) of RSUs Granted = $30,500,000

Total value (2/6/09)of Grants to top 15 executives= $111,905,000



These totals are far more than the top executives of Merrill Lynch were to receive as their year end bonuses in cash and equity. The New York Attorney General is supposedly investigating Merrill's executives for criminal wrong doing.

Merrill CEO, Thain was granting himself just $10 million whereas at least three Morgan executives exceeded that in equity compensation alone.

An interesting question arises from an examination of the fact that for the past two years grants were made on or around January 20. It just happened that the stock dropped prior to the grant and moved upward immediately after the grants. Its hard to accept the idea that those executives just got very lucky for two years in a row. Yes, I am suggesting collusion in the manipulation of the stock to accommodate the grants of options etc.

Some refer to this as spring-loading the options grants.

Is J.P. Morgan immune from investigation?

Now what we find is that bankers' errand boy extraordinaire CEO, James Dimon, is popping off about the ridiculous idea that J.P. Morgan does not need further bail-out money after Morgan grabbed $55 Billion in the Bear Sterns deal and another $25 Billion of TARP money in banker welfare payments. See:

http://www.bloomberg.com/apps/news?pid=20601109&sid=azVLk.22AkLI


If they do not need the bail-outs, let Morgan and Goldman return the welfare payments.

Perhaps also an explanation is in order of why James Dimon is not prosecuted for violations of Title 18 Section 208 U.S.C. in his role as Director of the New York Federal Bank in approving the J.P. Morgan/Bear Stearns deal.

Neither J.P. Morgan, Goldman Sachs or any other bank will return the TARP monies because the actual values of the Preferred Stock and Warrant packages were 50% lower than what the taxpayers were forced to pay. And the actual values of those packages have dropped considerably in every case since the welfare payments to Goldman, Morgan , Bank of America etc. were made.

In the case of Bank of America and Merrill, the warrants purchased by the Treasury are down over 88% since the bail-out.

from endthefed.us

Before the US House of Representatives, February 4, 2009, introducing the The Federal Reserve Board Abolition Act, H.R. 833.

Madame Speaker, I rise to introduce legislation to restore financial stability to America's economy by abolishing the Federal Reserve. Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy. In addition, most Americans have suffered a steadily eroding purchasing power because of the Federal Reserve's inflationary policies. This represents a real, if hidden, tax imposed on the American people.

From the Great Depression, to the stagflation of the seventies, to the current economic crisis caused by the housing bubble, every economic downturn suffered by this country over the past century can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial "boom" followed by a recession or depression when the Fed-created bubble bursts.

With a stable currency, American exporters will no longer be held hostage to an erratic monetary policy. Stabilizing the currency will also give Americans new incentives to save as they will no longer have to fear inflation eroding their savings. Those members concerned about increasing America's exports or the low rate of savings should be enthusiastic supporters of this legislation.
Though the Federal Reserve policy harms the average American, it benefits those in a position to take advantage of the cycles in monetary policy. The main beneficiaries are those who receive access to artificially inflated money and/or credit before the inflationary effects of the policy impact the entire economy. Federal Reserve policies also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state. It is time for Congress to put the interests of the American people ahead of special interests and their own appetite for big government.

Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy.

In fact, Congress' constitutional mandate regarding monetary policy should only permit currency backed by stable commodities such as silver and gold to be used as legal tender. Therefore, abolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation's founders: one where the value of money is consistent because it is tied to a commodity such as gold. Such a monetary system is the basis of a true free-market economy.

In conclusion, Mr. Speaker, I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans' standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.

Banksters still control the political agenda in the western world (as demonstrated by the blank cheque bailout packages) but the are losing support of investors. At least from an equity perspective the bankster bubble has burst. Lets hope this is a prelude to loss of power and therfore a return to political freedom and a financial system of trust, transparency and fairness.

Click on chart for larger view

Bulllionmark comment:

As we head toward another round of bailouts for Citigroup, Bank of America, JP Morgan, Deutsche Bank, HSBC, Goldman Sachs et al, remember that we are witnessing the the greatest swindle since the creature from Jekyll Island was created in 1913. The member banks of the privately owned Federal Reserve (who is no more Federal than Federal Express) will again be prioritized over the millions of citizens who have or will soon lose their job, be foreclosed on their home and have retirement savings wiped out. This deliberate action to privatize the profits and socialize the losses is theft plain and simple.

The following article by Michael S. Rozeff expands on this issue:

How to Steal Billions in Plain View: Bernanke’s Robber Banks

The Federal Reserve is living up to its purpose, which is to enrich bankers at the expense of everyone else. Ben Bernanke, who chairs the Federal Reserve Board, is to be congratulated for his open call for the banks under his tutelage to receive billions more of our tribute.

Let us understand the matter clearly. We have exited a significant boom period. During the boom, the bankers made large and very large profits. The managements took home very large pay and bonuses. The stockholders (including officers and managers of the banks) had, for a time, very large wealth in the stocks they held. The bondholders of the banks had, for a time, very secure debts.

But the bankers over-reached for business in several ways. They extended a slew of bad loans during the lately departed boom. The stocks and bonds fell in price, reflecting the lower worth of the bank assets, these bad loans.

And now that the boom is over, the bankers, led by Mr. Bernanke, want us to eat their losses.

Bernanke urges Congress to absorb the bad loans. The details of his three alternative plans are secondary to the fact that they all ask that others pay for the losses that the bankers caused, or else they involve the government in a variety of complicated maneuvers by which the government ends up shoring up these banks and bankers while taking on various risks of owning portfolios of bad loans. The idea is for the bankers to offload their mistakes onto taxpayers.

One plan has the government buy the bad loans. Why? Why don’t the bankers reveal what these loans are and sell them in the market? Such sales will reveal that their assets are worth even less than what the market now thinks. The insolvency of the banks will not only be revealed but it will trigger legal ramifications. The banks will have to be re-organized. This will mean breaking them up. It will mean that the holders of the securities of the banks will face large losses, even larger than are now being reflected in the current market prices.

A government bailout does the following. It preserves the bank organization. It preserves the current bank management. It transfers taxpayer wealth to the security holders of the bank (bondholders, preferred stockholders, and stockholders). It transfers wealth to counterparties to other contracts that the bankers entered into. Why is any of this necessary? What is so precious about these banks? Haven’t they demonstrated a level of high incompetence? Shouldn’t that spell their doom?

Heads I win, tails I win. That is the deal that Bernanke wants for the banks and these associated parties. Tails – they should be losing. No one else should be footing the bills.

Citibank or Citigroup is emblematic of the whole tawdry affair. Why in the world should we be saving Citibank? I have been wondering about this for some time before Bernanke’s latest salvo. The government already made a complex deal involving over $300 billion of this company’s loans. What is so special about this bank, other than it has attempted to become a world-girdling enterprise and is failing badly in this endeavor? It even has an office two miles from where I write that usually looks barren. Why should we support the ambitions of a bank like this that is competing with a myriad of other banks in this area alone? The reasons given by Bernanke are absurd ("to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,..."). Promoting overcapacity and singling out inefficient banks for the grace of taxpayer dollars does not promote a lasting recovery and it surely does not strengthen the financial system. Shifting the assets of Citibank, such as they are, to higher-valued uses through re-organization is a sound way to promote recovery and strengthen the economy. But this path would require that a lot of Bernanke’s favorites would bear losses. It would mean a rather different banking system might emerge that influential members of the Fed, who apparently shape its recommendations and bailouts, do not want.

What cheek! What effrontery! What brazen thievery! How disgusting!

The losses of the banks are already to a large extent reflected in the lower security prices of the stocks and bonds of the banks. However, investors do not yet know fully what these losses are because the bankers have not yet recognized and reported on them fully in their accounting or in any other way. If the government were not available as a possible trash bin, the banks would be forced into re-organization, and that is as it should be.

Banks, in Bernanke’s world, are not only to have insured deposits that lead them to make risky loans, investments, mergers, and expansions into all sorts of lines of business, which are overlooked by regulators such as the Fed and even encouraged by them, but they are also to be bailed out by government financing when these investments turn sour!

With the S&Ls, we had outright fraud engineered by S&L owners. With the banks, we have the equivalent bad incentives and the equivalent massive losses, but with the blessing and participation of the Fed and the government. It is a monstrous fraud in all but name, perpetrated in plain view.

I wish the whole dreary episode were over, but instead each day I am punished by more dreadful trial balloons and suggestions such as the latest emanating from Bernanke. There seems no end to the extent of it. Obama, the candidate of hope, comes across to me as a clueless patsy in this affair. If he understands any economics at all, he surely does not show it, not yet. According to the Wall Street Journal, he wants the second half of the $700 billion so that he won’t be caught without emergency funds if financial markets weaken further.

"In consultation with the business community and my top economic advisers, it is clear that the financial system, although improved from where it was in September, is still fragile...I felt that it would be irresponsible of me, with the first $350 billion already spent, to enter into the administration without any potential ammunition should there be some sort of emergency or weakening of the financial system."

The model being used by Obama and his advisers is that one shoots dollars at bear markets and failing firms, which is what the weaker financial system really means, and that these dollars cure the losses in value. (These dollars are of course printed up.) The idea is that one cures lower asset prices by injecting dollars into the system somehow. This inane idea parallels the equally inane idea of FDR and his advisers when he took office in 1932 that the cure was to raise the prices of goods and services.

Prices of assets fall because investors are forecasting worse business prospects and lower future cash flows of businesses. They are recognizing uses of capital that are not productive in a financial sense, that is, the recovery of one’s investment in terms of a cash flow return is too meager and too long-delayed to justify existing asset prices, and so these prices must fall. The injection of dollars into the system does absolutely nothing to cure the unproductiveness of capital. All it does is divert resources to still other uses that are unproductive.

The decisions as to what is productive or not cannot be lodged in the hands of marshalls in Washington loaded with six-guns ready to shoot billion dollar bullets every which way. They have no idea what the capital pricing should be or where capital should be shifted or what enterprises should receive new capital. They are politicians, economists, lobbyists, and lawyers. And, by the way, the title of economist does not by any means suggest that a person knows anything about the ins and outs of business or what businesses should receive capital or not. Academic economists often talk and act as if they know it all, but there is no evidence that they do. There is no evidence that any person or even group of persons is able to understand and direct an entire economy. Even in individual markets, the entrepreneurs closest to the action make frequent mistakes. Directing a "financial system" to a condition of stability and progress with $350 billion is a task beyond the scope of Mr. Obama and Mr. Summers or all the king’s horses and men. They can only throw sand into the gears. They need only look at the actions of their predecessors and the directives of past administrations who brought Fannie Mae and Freddie Mac into being, who encouraged subprime lending, who allowed insurance companies to endanger policyholders by writing credit insurance, and who recently have fallen into a $150 billion black hole with AIG. Closer to home, they might look at the long list of government actions in the past 15 months that have, more often than not, ultimately been associated with lower prices of stocks and corporate bonds.

It is obvious to all but those in government that the markets are attempting to mark prices down to realistic values and that this will facilitate recovery. The markets are attempting to weed out inefficient firms. It is obvious that there is overcapacity in some lines of production and some asset classes, and this capital must be priced out at market and brought into uses that are economic at the new and lower prices. It is obvious that the capital structures supporting many of these investments likewise have to be marked down in price and a good deal of it must disappear altogether. This is what deleveraging means. It is evident that there are losses to be borne by those who invested in these assets and those who hold this capital.

The government’s attempts to stem these adjustments are futile and counter-productive. Its wealth transfers, which are nothing more than theft, resolve nothing. The economy will recover in spite of government action, not because of it, and be delayed in doing it at that.

The Fed’s attempts to bail out its clients are worse than futile. They are blatant theft.