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

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

Welcome to the Island of Zero

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Intel Defense

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

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

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

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

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

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

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

How Corporations Game Taxes

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

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

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

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

How to Make Money with Terrorists

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

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

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

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

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

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

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

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

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

Quick Hedge Fund Facts

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

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

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

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

CEO to Worker Pay

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

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

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

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

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

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

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

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

Warning Before the Cruise

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

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

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

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

Today’s Iceberg

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

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

Where is the Liquidity

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

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

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

Thanks to Zero Hedge for their amazing investigative work:

The Capital Markets Liquidity Index subcomponents:

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

Goldman Monopoly

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

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

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

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

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

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

Dark Pools and Iceberg Orders

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

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

Where Reality Sinks

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

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

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

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

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

Life Boats and End Times

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

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

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

Part 2 Thoughts

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

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

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

Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That’s the other guy’s problem.  -Louis Winthorpe III

[This gap driven sideways market is grinding on the nerves of many traders.  During a time like this it often helps to step back and contemplate.  Here is some useful advice from very smart traders.]

20 Ways to Stop Losing Money

The Swing Shift by Alan Farley

Here’s a reality check as we slam headfirst into the January markets. The vast majority of retail traders lost money in 2007 and will lose money next year, despite ample doses of education, enthusiasm and brilliant ideas. In fact, at least 80% of all at-home speculators will eventually give up and wash out of the financial markets.

How can you buck this enormous tide and make 2008 your most profitable year in the trading game? To state the obvious, the best way to start making money is to stop losing it.

In that regard, here are 20 ways to staunch the bleeding and get back into the winner’s circle in the new year. Happy holidays, everyone!

1. Don’t trust the opinions of market gurus. Remember that it’s your money at stake, not theirs. Listen to what they say, then step back and do your own homework.

2. Don’t believe in a company. Trading isn’t investing, so you need to focus on the price action and forget the balance sheets. Leave the American Dream to Warren Buffett.

3. Don’t break your entry and exit rules. You made them for bad trades, just like the one you’re stuck in right now.

4. Don’t try to get even. This isn’t a game of catch-up. Every action you make has to stand on its own merits. Take your losses with detachment and make your next trade with absolute discipline.

5. Don’t trade over your head. If your last name isn’t Kass or Cramer, stop trading like them. Just concentrate on playing the game well, and stop thinking about making money.

6. Don’t seek the Holy Grail. There is no secret trading formula, other than good position choice and solid risk management. So why are you looking for it?

7. Don’t forget your discipline. Anyone can learn the basics of the trading game. Sadly, most of us will fail because of a lack of self-control, not a lack of knowledge.

8. Don’t chase the crowd. Tune out the groupthink and dance to the beat of your own drummer. Get out of the chat rooms and off the stock boards. This is serious business.

9. Don’t trade the obvious. Everyone sees the most perfect-looking patterns, which is why they set up the most painful losses. Simply stated, if it looks too good to be true, it probably is.

10. Don’t ignore the warning signs. Big losses rarely come without warning. Don’t wait for a lifeboat before you abandon a sinking ship.

11. Don’t count your chickens. That delicious profit isn’t yours until you close out the trade. Trail stops, take blind exits and do everything possible to get that money into your pocket.

12. Don’t forget the plan. Remember the reasons you took a trade in the first place, and don’t get blinded by greed or fear when the position finally starts to move.

13. Don’t have a paycheck mentality. You don’t need to get paid every week or every month, as long as you take advantage of the opportunities as they come. Classic wisdom: traders book 80% of their profits on just 20% of the days the market is open for business.

14. Don’t cut corners. There are very smart folks out there working full time to take advantage of your mistakes. Fight back by examining your results, updating your plan and finding working themes for the next session.

15. Don’t ignore your intuition. Listen to that calm little voice that tells you what to do and what to avoid. That’s the voice of the winner trying to get into your thick head.

16. Don’t hate losing. The best traders lose money on most of their positions, so get used to the pain of losing. And there’s a side benefit: the losing teaches more about winning than the winning itself.

17. Don’t fall into the complexity trap. Traders who can’t see the market are looking for it everywhere except in the price action. In truth, a well-trained eye will find more profits than in a stack of technical indicators.

18. Don’t confuse execution with opportunity. Expensive software won’t help you trade like a hedge fund. Pretty colors and flashing lights make you a more nervous trader, not a better one.

19. Don’t project your personal life onto your trading. Trading gives you the perfect opportunity to find out just how messed up your life really is. Get your own house in order before you play the financial markets.

20. Don’t think that trading is fun. The trading game should be boring the vast majority of the time, just like the real-life job you have right now.

Stages of a Trader

Stage One: The Mystification Stage (by Bo Yoder)

This is where the neophyte trader begins. He has little or no understanding of market structure. He has no concept of the interrelationship among markets, much less between markets and the economy. Price charts are a meaningless mish-mash of colored lines and squiggles that look more like a painting from the MOMA than anything that contains information. Anyone who can make even a guess about price direction based on this tangle must be using black magic, or voodoo.

However, as one begins to observe, read, study, the mess may begin to resolve itself into something that may make sense. Sort of.

Stage Two: The Hot Pot Stage

You scan the markets every day. After a while (sometimes a good long while), you notice a particular phenomenon which pops up regularly and seems to “work” pretty well. You focus on this pattern. You begin to find more and more instances of it and all of them work! Your confidence in the pattern grows and you decide to take it the very next time it appears. You take it, and almost immediately your stop is hit, and you’re underwater for the total amount of your stoploss.

So you back off and study this pattern further. And the very next time it appears, it works. And again. And yet again. So you decide to try again. And you take the full hit on your stoploss.

Practically everyone goes through this, but few understand that this is all part of the win-lose cycle. They do not yet understand that loss is an inevitable part of any system/strategy/method/whathaveyou, that is, there is no such thing as a 100% win approach. When they gauge the success of a particular pattern or setup, they get caught up in the win cycle. They don’t wait for the “lose” cycle to see how long it lasts or what the win/lose pattern is. Instead, they keep touching the pot and getting burned, never understanding that it’s not the pot (pattern/setup) that’s the problem, but a failure on their part to understand that it’s the heat from the stove (the market) that they’re paying no attention to whatsoever. So instead of trying to understand the nature of thermal transfer (the market), they avoid the pot (the pattern), moving on to another pattern/setup without bothering to find out whether or not the stove is on.

Stage Three: The Cynical Skepticism Stage

You’ve studied so hard and put so much effort into your trading and this universal failure in the patterns only when you take them causes you to feel betrayed by the market, the books and materials and gurus you tried to learn from. Everybody claims their ideas lead to profitability, but every time you take a trade, it’s a loser, even though the setups all worked perfectly before you played them. And since one of the most painful experiences is to fail when success looks easy, this embarrassment is transformed into anger: anger at the gurus, anger at the vendors, anger at the writers, the seminars, the courses, the brokers, the market makers, the specialists, the “manipulators”. What’s the point in trying to analyze and improve your own trading when there are so many dark forces out to get you?

This excuse-driven blame game is a dead-end viewpoint, and explains a lot of what you find on message boards. Those who can’t pull themselves out of it will quit.

Stage Four: The Squiggle Trader Stage

If you don’t quit, you’ll move into the “squiggle trader” phase. Since you failed with patterns and so on, you figure there’s some “secret weapon”, a “holy grail” that’s known to the select few, something that will help you filter out all those bad trades. Once you find this magical key, your profits will explode and you’ll achieve every dream you ever had.

You begin an obsessive study of every method and every indicator that is new to you. You buy every book, attend every course, sign up for every newsletter and advisory service, register for every trading website and every chat room. You buy more elaborate software. You buy off-the-shelf systems. You spend whatever it takes to buy success.

Unfortunately, you stack so much onto your charts that you become paralyzed. With so many inputs, you can’t make a decision, particularly since they rarely agree. So you focus on those which agree with the direction of the trade you’ve taken (or, if you’re the fearful sort, you look only for those which will prove to you how much of a loser you think you are).

This is all characteristic of scared money. Without a genuine acceptance of the fact of loss and of the risks involved in trading, you flit around like a butterfly in search of anything or anybody who will tell you that you know what you’re doing. This serves two purposes: (1) it transfers to others the responsibility for the trade and (2) it shakes you out of trades as your indicators begin to conflict. The MACD says buy, the sto says sell. The ADX says the market is trending, the OBV says it’s overbought. By the end of the day, your brain is jelly.

This process can be useful if the trader learns from it what is popular, i.e., what other traders are doing, and, if he lasts, how to trade traps and panic/euphoria. And even though he may decide that much of it is crap, he will, if he doesn’t slip back into the Cynical Skepticism Stage, have a more profound appreciation — achieved through personal experience — of what is sensible and logical and what is nonsense. He might also learn something more about the kind of trader he is, what “style” suits him best, learn to distinguish between what is desirable and what is practical.

But the vast majority of traders never leave this stage. They spend their “careers” searching for the answer, and even though they may eventually achieve piddling profits (if they don’t, they will of course eventually no longer be trading), they never become truly successful, and this has its own insidious consequences.

Stage Five: The Inwardly-Bound Stage

The trader who is able to pry himself out of Stage Four uses his experiences there productively. The trader learns, as stated earlier, what styles, techniques, tactics are popular. But instead of focusing entirely on what’s “out there”, he begins to ask himself some questions:

What exactly does he want? What is he trying to accomplish?

What sort of trading makes the most sense to him? Long or intermediate-term trading? Short-term trading? Day-trading? Trend-trading? Scalping? Which is most comfortable?

What instrument — futures, stocks, ETFs, bonds, options — provides the range and volatility he requires but is not outside his risk tolerance? Did he learn anything at all about indicators in Stage Four that he might be able to use?

And so he “auditions” all of this in order to determine what suits him, taking all that he has learned so far and experimenting with it.

He begins to incorporate the “scientific method” into his efforts in order to develop a trading plan, including risk management and trade management. He learns the value of curiosity, of detached interest, of persistence and perseverance, of taking bits and pieces from here and there in order to fashion a trading plan and strategy that are uniquely his, one in which he has complete confidence because he has tested it thoroughly and knows from his own experience that it is consistently profitable.

He accepts fully the responsibility for his trades, including the losses, which is to say that he understands that losses are inevitable and unavoidable. Rather than be thrown by them, he accepts them for what they are, a part of the natural course of business. He examines them, of course, in order to determine whether or not some error was made, particularly one that can be corrected, though true trading errors are rare. But, if not, he simply shrugs off the loss and goes on about his business. He understands, after all, that he is in control of his risk in the market.

He doesn’t rant about his broker or the specialist or the market maker or that vast conspiracy of everyone who’s trying to cheat him out of his money. He doesn’t attempt revenge against the market. He doesn’t fret. He doesn’t fume. He doesn’t succumb to hope, fear, greed. Impulsive, emotional trades are gone. Instead, he just trades.

Stage Six: Mastery (also from Vad Graifer)

At this level, the trader achieves an almost Zen-like trading state. Planning, analysis, research are the focus of his time and his effort. When the trading day opens, he’s ready for it. He’s calm, he’s relaxed, he’s centered.

Trading becomes effortless. He is thoroughly familiar with his plan. He knows exactly what he will do in any given situation, even if the doing means exiting immediately upon a completely unexpected development. He understands the inevitability of loss and accepts it as a natural part of the business of trading. No one can hurt him because he’s protected by his rules and his discipline.

He is sensitive to and in tune with the ebb and flow of market behavior and the natural actions and reactions to it that his research has taught him will optimize his edge*. He is “available”. He doesn’t have to know what the market will do next because he knows how he will react to anything the market does and is confident in his ability to react correctly.

He understands and practices “active inaction”, knowing exactly what it is he wants, exactly what it is he’s looking for, and waiting, patiently, for exactly the right opportunity. If and when that opportunity presents itself, he acts decisively and without hesitation, then waits, patiently, again, for the next opportunity.

He does not convince himself that he is right. He watches price movement and draws his conclusions. When market behavior changes, so do his tactics. He acknowledges that market movement is the ultimate truth. He doesn’t try to outsmart or outguess it.

He is, in a sense, outside himself, acting as his own coach, asking himself questions and explaining to himself without rationalization what he’s waiting for, what he’s doing, reminding himself of this or that, keeping himself centered and focused, taking distractions in stride. He doesn’t get overexcited about winning trades; he doesn’t get depressed about losing trades. He accepts that price does what it does and the market is what it is. His performance has nothing to do with his self-worth.

It is during this stage that the “intuitive” sense begins to manifest itself. As infrequent as it may be, he learns to experiment with it and to build trust in it.

And at the end of the day, he reviews his work, makes whatever adjustments are necessary, if any, and begins his preparation for the following day, satisfied with himself for having traded well.

The knowledge proved through research that a particular price pattern or market behavior offers an acceptable level of predictability and risk to reward to provide a consistently profitable outcome over time.

Characteristics of a Primary Bear Market

Stage 1: Distribution (by Author Unknown)

Just as accumulation is the hallmark of the first stage of a primary bull market, distribution marks the beginning of a bear market. As the “smart money” begins to realise that business conditions are not quite as good as once thought, and thus they begin to sell stock. There is little in the headlines to indicate a bear market is at hand and general business conditions remain good. However stocks begin to lose their lustre and the decline begins to take hand. After a moderate decline, there is a reaction rally that retraces a portion of the decline. Hamilton noted that reaction rallies during a bear market were quite swift and sharp . This quick and sudden movement would invigorate the bulls to proclaim the bull market alive and well. However the reaction high of the secondary move would form and be lower than the previous high. After making a lower high, a break below the previous low, would confirm that this was the second stage of a bear market.

Stage 2: Movement With Strength

As with the primary bull market stage two of a primary bear market provides the largest move. This is when the trend has been identified as down and business conditions begin to deteriorate. Earnings estimates are reduced, shortfalls occur, profit margins shrink and revenues fall.

Stage 3: Despair

At the final stage of a bear market all hope is lost and stocks are frowned upon. Valuations are low, but the selling continues as participants seek to sell no matter what. The news from corporate America is bad, the economic outlook is bleak and no buyers are to be found. The market will continue to decline until all the bad news is fully priced into the stocks. Once stocks fully reflect the worst possible outcome, the cycle begins again.

How Treasury Auctions Work

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

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

Can the United States government go bankrupt?

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

Can’t we just turn the printing press on?

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

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

You imagine we could get there?

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

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

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

A bank isn’t the United States government.

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

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

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

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

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

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

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

UK government bond auction comes up short:

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

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

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

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

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

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

My speech to Gordon Brown goes viral:

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

Last night’s Frontline interview with David Walker:

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

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

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

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

Conclusion

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

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

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

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

Notice the Timing

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

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

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

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

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

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

Three days later…

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

CBS: A Tool of the Elite

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

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

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

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

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

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

What Fascism Looks Like Today

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bernanke Buys Bonds

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

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

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

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

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

How Shadow Banking Works

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

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

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

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

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

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

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

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

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

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

How the Final Crash Might Happen

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

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

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

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

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

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

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

This was what Bernanke said:

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

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

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

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

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

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

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

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

Nouriel Roubini declared:

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

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

What Will the End Game Look Like?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources:

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

Many of us trading today’s market have been fighting the trend.  We fight it going down and we get chopped to pieces when it goes sideways.  However, the downtrend remains strongly intact.

There are methods to slow down one’s trading and catch the overall trend.  Patience brings us plenty of individual stocks with good entry opportunities.  GTM is now featuring the stocks we follow using Markt Club’s technology for entries and exits.  This has been a valuable service run by very attentive people.  It is particularly useful for IRA accounts and multi-week swing trades.

Check out GTM’s new page highlighting recent trade alerts:

Market Club Feature Page

• Market at new lows/breaking point
• Relatively high VIX
• High CBOE Put/Call Ratio
• Major pressure on the Financials [banks -20%]
• Negative NYSE Internals [worse than 5:1]
• Political pressure
• Fear/Panic

What to look for is a massive buy candle on any of the major indexes.  It will be as long as today’s first 5min down candle–a massive candle.  We’re looking for a BIG countertrend move on a major negative day.

My plan is to go ALL IN on FAS and get more than a +10% move.  I’m looking for $2 ideally taking profit right before the close.  The close should be the day’s high for the market.

If anyone knows the capital it takes to move the Dow Futures +100 points please let me know.

[Update from the close:  That was not a PPT push, but a bull fight.  A PPT Day shows no hesitation or stalling into gap fills.  A PPT push today would have blown up to the SPX open within 5mins then past it--without hesitation.  That's why it's PPT, massive capital is behind the move.  Still it was a nice move, just not sure enough to go ALL IN with conviction.]

PPT Day Characteristics

These moves typically occur after 2:30pm Eastern while the market is near a new low or breaking point, with a relatively high VIX.  Another characteristic is a large NYSE Adv/Decl negative ratio.  One that is negative 10:1 going into lunchtime typically assures a weak close.  Ratios of 3:1 negative aren’t what you want. They are easier to manipulate by weak bulls. You want a big scary ratio. It is these negative internals that can clue you into the probability of a PPT push.  A big push on a big negative internal is the tell. To instantaneously swing the market around on these days takes a massive amount of concerted capital.

If you watched the market every day last year you know what this looks like.  Using 5min candles on your favorite index you will see an immediate and massive full body candle, sometimes eclipsing the entire day’s range in minutes.  There is no mistaking this move.  It’s a wide-eyed holy crap moment!  After this massive push the market will typically close near the high of the day.

Here is a 15min chart of the SPY from last March–somewhat similar to today.  This is what a breakout looks like:

The PPT pushes are preceded by doom and gloom breakdowns.  These volume pushes fail to buoy the market after a few days.  In some cases it’s a rinse-wash-repeat move over the course of a few weeks.  Learn to anticipate it, regardless of the mechanics of why the push comes.

Often a panic sell-off precedes a PPT push, which breaks down into orderly selling, which causes another PPT push.  Watch for one this week or next week, possibly mirroring this move from last November:

There’s a similar feel to this month, except we’re missing a second PPT push:

Taking the Trade

The key to a PPT day is entering on the first push of a massive volume breakout.  You have to be prepared to enter in a matter of seconds.  That or have a resting buy/stop order sitting above a resistance area on your favorite stock.  Look for an entry that won’t get hit by a false probe.  During these moves it usually doesn’t matter which of the day trade stocks you pick–they all go up.  Some potential stocks right now are FAS MA FSLR GOOG BIDU ICE CME GS and other big liquidity names.  Trade what you know.

A good risk/reward setup are breakouts from tight consolidation ranges.  If you anticipate the move place a market buy order slightly above the range.  When the order fills put in your max loss stop and then be patient to the close.  Another method is to wait 10 minutes after the fill and then put your daily profit stop in.  If the entry was golden (profit stop doesn’t hit) exit manually near the close. It’s possible to get several months of profit off these extreme moves.

This chart of ABK from last year is a great example.  In anticipation of a PPT breakout a rested buy order above $8.70 was placed.  Going big, say 10,000 shares, a market order is a must.  The fill price isn’t as important as catching the momentum.  There is a saying, “Don’t be a prick over a tick.”

Conclusion

The essence of this strategy is catching a home run with a low risk entry.  Holding into the following day is a personal risk preference.  However, using margin hoping for continuation into the next day is very risky.  Follow through days have been trending down for decades now, and are especially thin today.  Hoping that will happen often eats through the profits on a perfect trade.

“The choice is between which mistake is easier to correct: underdoing it or overdoing it.” -Tim Geithner May 30, 2008

Ever notice how official speeches to prop up the US capital markets are timed right before a massive sell off?  How about those last hour rallies when the market looks really bad?  Today was a great example of a Plunge Protection Team (PPT) trading day.  This article will explain who they are, how they operate, and how you can profit.

Consider the background story on today’s market.  Does it make sense to engineer a rally while stalling on a stimulus plan.  The Washington wait-n-see numbers game is going strong.  Politicians, and the money behind them, are holding their ammo in reserve–no matter how often they deny this agenda.  They did it with the auto makers two months ago. Remember that?  A bailout was going to save the auto makers and then the market rallied out of nowhere, just when all looked lost.  The auto bailout almost became a non-event. The critical size of their cash infusion was nowhere near the size initially rumored.  The reality is, credit needed to cover all systemic threats to the market doesn’t exist. They wait and see for who is about to die, then they jump.

GTM covered this topic in detail last year, during a similar market environment.  You can read the full story here: Front Running A Systemic Market Crash: PPT Style.

Mechanics of the PPT
The following is from Robert McHugh, Ph.D. at Technical Indicator Index:

The origin of the Plunge Protection Team Intervention Risk Indicator:

For the past several years, we have seen repeated “out of the blue” short-covering rallies just about the time a  decline seems to be gaining some momentum. Our suspicion has been that the “Working Group” established by law in 1988 to buy markets should declines get out of control, has become far more interventionist than was originally intended under the law. This group has since been dubbed the Plunge Protection Team. There are no minutes of meetings, no recorded phone conversations, no reports of activities, no announcements of intentions. It is a secret group including the Chairman of the Federal Reserve, the Secretary of the Treasury, the Head of the SEC, and their surrogates which include some of the large Wall Street firms. The original objective was to prevent disastrous market crashes. Lately, it seems, they buy markets when they decide markets need to be bought, including equity markets.

Their main resource is the money the Fed prints. The money is injected into markets via the New York Fed’s Repo desk, which once upon a time showed up in the M-3 numbers, warning intervention was nigh. But, in November 2005, the Fed announced with little comment and no palatable explanation that it would no longer report the M-3 number after March 2006. Without the useful resource of M-3, we needed to find other tools to monitor when the PPT is likely to intervene, prolonging a rally and killing shorts.

For the PPT to be effective in driving markets higher, the potential for a sustained turnaround rally depends upon a high volume of open short interest. By measuring this short interest by the level of CBOE put options, we can gauge when markets are ripe for PPT intervention. The way it works is, the PPT decides markets need intervention, a decline needs to be stopped, or the risks associated with political events that could be perceived by markets as highly negative and cause a decline, need to be prevented by a rally already in flight. To get that rally, the PPT’s key component — the Fed — lends money to surrogates who will take that fresh electronically printed cash and buy markets through some large unknown buyer’s account. That buying comes out of the blue at a time when short interest is high. The unexpected rally strikes blood, and fear overcomes those who were betting the market would drop.

These shorts need to cover, need to buy the very stocks they had agreed to sell (without owning them) at today’s prices in anticipation they could buy them in the future at much lower prices and pocket the difference. Seeing those stocks rally above their committed selling price, the shorts are forced to buy — and buy they do. Thus, those most pessimistic about the equity market end up buying equities like mad, fueling the rally that the PPT started. Bingo, a huge turnaround rally is well underway, or a rally already underway is extended, and sidelines money from Hedge Funds, Mutual funds and individuals rushes to join in the buying madness for several days and weeks as the rally gathers a life of its own.

Ways to Build Edge for a PPT Rally

Look at the Fib 49.20 reversal on the VIX from the Oct. swing high and Jan. swing low:

Look at the 3min bars on FAS when it broke consolidation at $7.55.  This was a good setup. Another piece of edge for those anticipating a PPT push, which turned a breakdown into a clean W shaped day:

This is what a PPT rally looks like.  The prior day’s closing hour was a clue this could happen today. The yellow arrows show yesterday and today’s PPT push (right back to the previous day’s close–coincidence?):

This is what it looked like for the S&P 500.  Intraday you can see it happen with a massive push, the biggest move for the day:

Conclusion

Some people are calling today a bottom.  They are calling for a sustained bull rally.  Please consider our explanation of the PPT in lieu of a greed based wild guess.  We are in the greatest bear market of our lifetime.  Do you really think this market can turn around–suddenly?  See the Picture of the Day and draw your own conclusions about the overall market direction.

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

How Manipulators Game the Market

Our Engineered Meltdown: SEC Evidence

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

Gary Aguirre memo to Senate Banking Feb. 13, 2008

Courtesy of: InvestigatetheSEC.com:

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

Dear Chairman Dodd and Ranking Member Shelby:

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

1) Why did counterparty discipline fail?

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

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

Where is the SEC?

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

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

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

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

Sincerely,

Gary J. Aguirre