MAY 2005

"What prosecutors are recognizing is that across the financial field, the one weapon that seems to work, frightening as it is, is the criminal sanction,"

Fifteen NYSE Traders Indicted

Investors Were Cheated, U.S. Says

By Carrie JohnsonWashington Post Staff Writer
Wednesday, April 13, 2005; Page A01

Fifteen current and former traders at the New York Stock Exchange were criminally charged yesterday with cheating investors out of the best prices for their stock trades in what could be unparalleled abuse of their position at the world's largest and most prestigious stock market. The exchange also faces disciplinary action for failing to adequately police its sprawling floor, where 1,366 traders handle an average of 1.6 billion shares a day. The traders are accused of getting in between orders to buy and sell, taking for themselves the best prices and depriving investors who ordered the trades of at least $32.5 million.

"These defendants broke the rules repeatedly, they cheated the markets, and they cheated the investors who relied upon them," said Manhattan U.S. Attorney David N. Kelley.

The indictments are the result of a two-year investigation into one of the widest-ranging manipulations ever of trading at the exchange, known as the Big Board, and they follow a series of ethical breaches in recent years that have tarnished the exchange's image as the most transparent and fair market in the world. The stocks at issue in the improper trading include some of the nation's biggest companies, including Bank One Corp., Eli Lilly and Co., Hewlett-Packard Co., Merrill Lynch & Co., Pfizer Inc., Time Warner Inc. and the Walt Disney Co., according to court papers. The charges come at a time when investor confidence already has been eroded by years of accounting scandals and revelations of illegal mutual fund trading. The abuses operated within the heart of a system that was designed to protect the interests of investors and to ensure they receive the best price for their trades.

At the same time the indictments were announced, the Securities and Exchange Commission filed separate civil charges against the 15 traders and five others. The traders "showed a disregard for their legal duty that was both profound and at times, profane," said Mark K. Schonfeld, director of the SEC's Northeast regional office. In some cases, these traders, known as specialists, made statements explicitly denigrating investor orders placed through the exchange's electronic trading system, known as the designated order turnaround system, or DOT. Unnamed specialists said, "Screw the DOTs," according to an SEC news release.

Most purchases and sales of securities on the NYSE go through a system in which specialists are assigned to monitor particular stocks. They are obliged to match customer orders with each other whenever possible and ensure that the trading system works smoothly to find the best prices for buyers and sellers, experts said. Trades in the stocks may be made only through the specialists, which is why their role is so critical.

Traders were accused yesterday of buying or selling stock for their own accounts at prices that were better than those they gave to existing public orders. That practice is known as "trading ahead," regulators said. The specialists also were accused of using a trick in which they bought a customer "sell" order and then sold at a higher price into an opposite "buy" order from another customer, pocketing the difference. Such moves helped the traders lock in guaranteed profit at the expense of their customers. The fraudulent practices enriched the specialist firms and resulted in higher salaries and bonuses for people who took part in the manipulation, U.S. Attorney Kelley said.

The SEC settled civil charges against the NYSE for failing to police and discipline the errant specialists. The exchange, which did not admit or deny wrongdoing, agreed to spend $20 million to beef up regulatory audits by hiring an independent reviewer. The exchange also said it would start an 18-month pilot program to provide video and audio surveillance of activity related to at least 20 stocks on the trading floor. The SEC criticized the exchange's monitoring system, saying it was set up to uncover "only the most egregious instances of trading violations."

Richard G. Ketchum, the exchange's chief regulatory officer, said the NYSE has strengthened its enforcement unit and installed new technology to prevent improper trading since the investigation began in 2003. The regulatory unit now reports directly to the board of directors, rather than the NYSE chief executive, to help insulate it from pressure from traders and member firms. "Specialist firms have changed, as have we," Ketchum said in a news release.

"It's highly unusual and somewhat shocking to see criminal activity on the floor of the New York Stock Exchange," said Jacob H. Zamansky, a securities lawyer who represents individuals suing Wall Street firms. "It also highlights that the NYSE seems incapable of supervising [traders]. It's a big setback for investor confidence."

U.S. Attorney Kelley pointed out that 14 of the people indicted yesterday at some point served as supervisors or managers at their respective firms -- Fleet Specialist Inc., now Banc of America Specialist Inc.; Bear Wagner Specialists LLC; LaBranche & Co.; Spear, Leeds & Kellogg Specialists LLC; and Van der Moolen Specialists USA. Most of the defendants, except for one authorities say is at large in the Netherlands, surrendered yesterday morning and were scheduled to appear in court for arraignments. These firms and two others, SIG Specialists Inc. and Performance Specialist Group LLC , agreed to pay $247 million to settle related civil charges last year. Indicted were David A. Finnerty, Donald R. Foley II, Scott G. Hunt and Thomas J. Murphy Jr. of Fleet; Frank A. Delaney IV and Kevin M. Fee of Bear Wagner; Freddy DeBoer of LaBranche; Robert A. Johnson Jr. at Spear, Leeds; and Patrick J. McGagh Jr., Joseph Bongiorno, Michael J. Hayward, Richard P. Volpe, Michael F. Stern, Gerard T. Hayes and Robert A. Scavone of Van der Moolen.

Columbia University law professor John C. Coffee Jr. said the criminal charges against specialists based on fundamental trading practices are unprecedented -- and a direct result of increased scrutiny by law enforcement authorities across the financial services industry. "What prosecutors are recognizing is that across the financial field, the one weapon that seems to work, frightening as it is, is the criminal sanction," Coffee said.

The NYSE previously settled civil charges related to inadequate policing of independent floor brokers in 1999. Eight brokers connected to Oakford Corp. faced criminal charges for setting up secret accounts using phony documentation and illegally profiting from them in the late 1990s. The investigation by federal prosecutors continues, according to spokeswoman Megan L. Gaffney.


The Invisible Hand
(of the U.S. Government)
in Financial Markets
by Robert Bell
April 3, 2005

Summary: The U.S. government is manipulating all major U.S. financial markets—stocks, treasuries, currencies. This article shows how it is possible and how it is done, why it is done, who specifically is doing it, when they do it, and where they get the money to do it.

Most people probably believe that the major capital markets in the U.S. are basically true markets with, occasionally, maybe very occasionally, a little bit of rigging here and there. But evidence shows that the opposite is the case—the rigging is fundamental with a little bit of true markets here and there. I have discussed how this works concerning U.S. and some other stock markets in an earlier article.[1] Here I will primarily discuss the rigging of currency and U.S. Treasury markets.

Perhaps the main reason for the urban legend that major markets are not generally rigged is that they are assumed to be too big; the millions of independent buyers and sellers, worldwide because of globalization, make effective and sustained coordination impossible. The implicit assumption is that any market could be systematically rigged if it were small enough, or at least small enough at some critical choke point.

Little Markets

In the case of the market for U.S. Treasuries, the Financial Times summed up exactly how small it really is in two major stories, one just under the masthead on page one, on 24 January 2005. One story began, “During the past few years the US has become dependent, not so much on millions of investors around the globe but on a few individuals in a few of the world’s central banks.”[2] In 2003 these central bankers bought enough treasuries to cover 83% of the U.S. current account deficit, and 86% of those purchases came from Asian central banks.

The two main sources of money for U.S. Treasuries are the central banks of Japan and China. Japan held about $715 billion in U.S. Treasuries, as of November 2004, and China held about $191 billion.[3]All the other nations’ central banks hold altogether, about the same amount again, roughly another trillion.

As the total of all obligations is about $4 trillion, two central banks obviously hold about one quarter of the total. They are in the position to pump or dump the Treasury market all by themselves. They can sell what they have or simply stop buying when the Treasury sells.

Since the money comes from a handful of foreign central banks, the possible rigging of the Treasury market equals the possible rigging of the foreign exchange markets. These central banks have to buy dollars before they buy Treasuries. Even Alan Greenspan has acknowledged that the two go together, admitting that Asian central banks “may be supporting the dollar and U.S. Treasury prices somewhat.”[4]

U.S. stock markets are also capable of being systematically rigged, and for the same reason—a handful of players can dominate if they coordinate their actions. The key choke point is in the number of mutual funds, which themselves hold about 20% of all the stock in the major markets. Of the over 8000 all-stock mutual funds, a mere 497 hold roughly three-fourths of the stock. This is easily a small enough number to pump the market, whether through coordinated buying disguised as programmed trading, or simply a follow-the-leader mechanism.  All the other thousands of funds and the millions of individuals around the globe putting their money into these markets can do little more than follow the momentum. No major U.S. stock market writer, advisor or player seems to publicly acknowledge this, as far as I know. But the CEO (PDG) of the French insurance giant AXA has acknowledged it: Claude Bebear wrote in his 2003 book Ils vont tuer le capitalisme (They are going to kill capitalism):

“… today, shareholders are relegated to the role of quasi-spectators. The small shareholders that are now called ‘individual investors’ know that they have little weight. All together, they only represent a small percent of capital because the investments of households  are more and more in the form of mutual funds, pension funds (fonds communs de placement) or life insurance funds. The shareholders today are thus the institutional investors.[i] [5]

Bebear, in charge of one of the world’s biggest stock portfolios, adds:

We are no more, in effect, in a world that one reads in the economic text books, with innumerable investors of various characterizations, choosing each in his own way the stocks that he’ll put in his portfolio; the results of their millions of decisions generating a sort of changing market equilibrium, but a stable one. The truth is that for several years, the reasoned investment on a stock has almost disappeared in favor of more and more mechanical behavior.[ii] [6]

Plunge Protection

Programmed trading in an utterly concentrated stock market pretty much guarantees the possibility of systematic and continual market rigging. But to accomplish this, and coordinate it with the currency and Treasury markets, some sort of orchestrating mechanism would need to exist. It does; it is known as the President’s Working Group on Financial Markets, occasionally referred to in the business press as the Plunge Protection Team. Then President Ronald Reagan signed it into existence on 18 March 1988, with the specific intension to avoid another stock market crash such as that of 19 October 1987. The Working Group’s existence is no mystery. See for yourself. Go to Google and type in Executive Order 12631. You will find the Executive Order, and even a 14 November 2003 statement from Secretary of the Treasury John Snow giving a brief history of the Working Group, describing its policy advisory activities, and concluding with these words: “It also is a forum used to exchange information during market turmoil through ad hoc conference calls and meetings.”

Presumably Plunge Protection doesn’t hold these ad hoc conference calls and meetings just to be passive bystanders.  Executive Order 12631 specifically authorizes them to coordinate buying: “The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.”

So not only is the fix in, it is legal.

In a 1989 Wall Street Journal article, then Federal Reserve board member Robert Heller even suggested a market intervention strategy: “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole.”

Guess Whose Money is Used to Buy Stock Market Insurance?

There is even a potentially unlimited source of money to do this pumping. Federal government contractors operate under a special law, CAS, in their defined benefits pension plans. This gives them stock portfolio insurance, something which small fry players would obviously like to get, but can’t find anyone willing to issue. Should the pension funds of the federal government contractors lose money in their investments to the degree that they fall below minimum reserve requirements imposed by other federal laws, they can simply make up the difference by adding it on pro-rata to subsequent items sold to the federal government. The vast sums of federal tax money devoted to plugging the holes in the pension fund for the largest Pentagon contractor, Lockheed Martin, were discovered by Ken Pedeleose, an analyst at the Defense Contract Management Agency. He was concerned about staggering cost increases for the C-130J transport but a chart he made public showed the mind boggling per plane cost increases for a number of Lockheed Martin airplanes. The chart amounted to a Rosetta Stone for the military-industrial complex. It showed, essentially, how the military-industrial complex linked to the stock market through the Lockheed Martin pension fund, and by extension through all the others covered by the same law.

Is there a corresponding source of tax money to pump the currency and Treasury markets?  There is an official one for currency, the Exchange Stabilization Fund. It was established in 1934 to prop up the dollar in foreign exchange markets. But it can be used for any purpose determined by the Secretary of the Treasury. In mid-1995, the fund contained $42 billion.[iii]  The actual amount varies depending on how well the Treasury does on its currency transactions. The money originally came from the sale of U.S. government gold, but the Treasury kept the money as a private fund, not under Congressional control. Since it is a finite amount of money, not appropriated by Congress, it probably is not often used to pump the stock market or even the market for Treasuries.

The markets for Treasuries, and also currency, are being pumped using the tax code and pension fund laws. But to understand this we have to first look at why pumping might be necessary.

Treasuries Exchanged for Jobs

The U.S. Treasury holdings of Japan and China are essentially a consequence of a trade imbalance between the U.S. and these two countries, with the balance heavily tilted to the latter. To maintain the imbalance, which they both clearly want to do, both countries must keep their currency pegged against the dollar at a lower rate than it might otherwise be. If they did not do that, the Toshiba computers, Toyota cars and other quality items made in Japan would be more expensive, and so Japan wouldn’t sell as many of them in the U.S. A similar case holds for vast numbers of Chinese manufactured items sold pretty much everywhere, but notoriously at  Wal-Mart.  To keep the items relatively cheap, the central banks of those countries keep their currencies cheap by buying a corresponding amount of dollars, thus supporting the dollar against their currencies. The dollar may essentially collapse against the euro, but not against the yen and the yuan.

With the dollars the Japanese and Chinese central banks have bought, they can buy something denominated in U.S. dollars; the item of choice is U.S. Treasuries since it is like holding dollars that pay interest. So this has the effect of pumping the price of Treasuries too. Because the items made in China and Japan are cheaper than those of corresponding quality made in the U.S. (in the case of many Japanese items, there may not be U.S. items of similar quality), the effect is to create manufacturing jobs in those countries while simultaneously losing them in the U.S. In effect the jobs are exported and foreign currency is imported to buy dollars and then Treasuries.

This has an advantage for the Bush administration, which has the ruinously ridiculous policies of simultaneously cutting taxes and waging wars or building up for them. In effect, the basic racket is: the Bush administration exports jobs to these countries, and in turn they finance Bush’s fiscal deficit so he can continue his wars and cut taxes for his friends. The deficit for 2005 will be at least $400 billion, according to the Congressional Budget Office.[7] The Pentagon budget for 2005 was about $400 billion. Add in two supplemental requests for the costs of his Iraq war and the Pentagon figure is roughly $500 billion. “It is interesting to note that the military budget is about the same order of magnitude as the fiscal deficit,” said veteran Pentagon waste fighter Ernest Fitzgerald.

The tax cuts were at least in part intended to stimulate spending—the purchase of all those Toshibas, Toyotas and Chinese whatnots. So the fiscal deficit is intimately linked to the current account deficit. If the money had been taxed away to pay for Bush’s current war and arms build-up for future ones, it would not be in people’s pockets to pay even for the down payments on the Toyotas.

But won’t the Japanese and Chinese central banks ultimately get burned by holding vast quantities of dollar denominated assets? Sure, if the dollar ever collapses against their currencies too. The dollar having fallen roughly 30% against the euro since the beginning of the war in Iraq, the same fate or worse could await these Asian currencies. With currently issued Treasuries paying a coupon rate of no more than 4%, they would be materially shafted on their investments in U.S. Treasuries. Then why don’t they bail out?

The Emperors’ Revenge

For the Chinese, the basic racket is too delicious and too ironical. They industrialize their country at the expense of the de-industrialization of the U.S. Not only is it sweet revenge for more than a hundred years of humiliation at the hands of Europeans and Americans, but also at the end they are relatively strong and the U.S. is relatively not. What do they care if the deal isn’t quite as good as it would be in a perfect world and they lose a third, half, two-thirds of their savings in U.S. Treasuries? Besides, in an even mildly less imperfect world, the U.S. President would not make such a blatantly corrupt bargain against the people of the U.S. Billionaire investor Warren Buffett calls this system of indebting U.S. citizens to foreign governments “a sharecropper’s society,” to distinguish it from Bush’s supposed “ownership society.”

No wonder Chinese central bank governor Zhou Xiaochuan told a press interviewer at the time of the G-7 session in London in early February, “now is not the time” to revalue his currency, the yuan.[8]Of course it is not. He is clearly not stupid. The time to revalue is after China has sucked all the remaining jobs out of the U.S. that it can or just before the U.S. gets a less dishonest government.  For the Japanese, the basic sweetness of the deal plus geopolitical strategic reasons may keep them tied to the U.S. There is also the spirit of J. Paul Getty’s famous line: “If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.”  Some Japanese clearly think they have a problem. Prime Minister Junichiro Koizumi said on 11 March 2005 concerning his government’s U.S. dollar holdings, “I believe diversification is necessary.” This instantly shook the currency markets, causing the director of the Japanese finance ministry’s foreign exchange division, Mastatsugu Asakawa, to blurt out, “We have never thought about currency diversification.”[9]

Mr. Asakawa has been kept busy making this point. On 23 February 2005 he had already stated, “We have no plans to change the composition of currency holdings in the foreign reserves and we are not thinking about expanding our euro holdings.”[10] He added, “Valuation loss is not our primary concern. My opinion is that I don’t have to care seriously about that.”[11]

There are, of course, other major single party buyers of dollars and Treasuries besides the central banks of Japan and China. In fact Mr. Asakawa’s earlier remark was precipitated by a market panicking statement on 22 February from the Bank of Korea. They indicated they were considering diversifying some of their $200 billion in currency reserves, 70% of which were in dollars. The dollar plunged 1.2% against both the yen and the euro. Part of this was due to programmed trading which kicked in with sell orders after the dollar hit a threshold of $1.3210 to the euro.[12]  After the dollar suddenly fell, South Korean officials quickly announced they wouldn’t sell any of their existing dollar reserves, leaving open the possibility of putting new reserves into other currencies.

South Korea, presumably, can be muscled.  Other central banks are less susceptible to pressure. On 5 February 2005 Russia announced that it would no longer peg the ruble to the dollar, but instead to a shifting weighting of dollars and euros. Russia had been selling dollars and buying euros since October 2004, during which time the U.S. dollar had tumbled significantly against the euro.[13] This of course corresponded to the period when Bush was seen to be back in power for another four years.

The overwhelming consensus of financial writers was that both the dollar and Treasuries would really hit the skids in the new year, 2005. The consensus was global. For example, the French financial paper, Les Echos wrote in its edition of 21-22 January: “Until now, it was a question of the great bet adopted nearly unanimously by foreign exchange traders—the dollar will fall in 2005.”[14]

Of course, as implied by the quote, the dollar did not fall. Nor, of course, did its fat twin, U.S. Treasuries, which are little more than interest paying dollars. Is this because the trade deficit improved? Not really, although it showed a slight gain in early February, long after the dollar and Treasuries had materially improved. The dollar had gone up 3.6% from 1 January 2005 until 22 February 2005. Why? Did Bush raise taxes, thereby erasing some of the fiscal deficit? Not at all. On the contrary, he cut taxes—as usual for a select group—and that’s why the dollar rebounded.

Plunge Protection’s New Cash

In late October 2004, the U.S. public was looking the other way when the tax cut was passed. Most people were obsessing over who would win the presidential election.  Few were paying much attention to what the Republicans in Congress were doing, which was giving billions in tax cuts to U.S. corporations which had profits parked in tax havens around the world, such as in Ireland or Singapore. Bush signed the law enabling this tax giveaway on 22 October 2004. The tax changes were noted by a few at the time, even before the law changed. But the general level of financial journalism is so bad that they got no real echo in the press. Most people speculating against the dollar had no idea they were about to get stung. Obviously a few knew what the implications of the tax law were. They made out, more or less literally, like bandits. But one cannot legitimately claim insider trading since the tax law changes were publicly available knowledge, and even made it to the internet on various accountant websites in October. But they don’t seem to have gone much beyond these specialists. On 15 January 2005, I had a long talk in Paris with a top European stock market guru. Well connected and with a devoted following which he obviously did not want to burn, he had in all sincerity advocated buying gold to a gathering of thousands of his devotees a couple of months earlier, in November, after the passage of the U.S. tax law. 

Most speculators were caught unaware on this source of currency pumping money, so it is unreasonable to assume that there will not be other surprises, which will be announced in due course.

The law Bush signed in late October 2004 goes by the obscenely false name, the American Jobs Creation Act. If there is one thing it will not do is to create jobs. It will instead create takeovers, which nearly always produce losses in jobs—in the name of synergy. Takeovers are on the limited menu of activities companies are permitted to do with the money they can “repatriate” under this law. Not that the limited menu makes much difference, since the money brought in does not have to be fenced off in any way. So if $10 billion were spent by a company on takeovers, that frees up another $10 billion to do whatever was prohibited under the law, such as paying dividends, buying back stock, or filling the pockets of executives with extra bonuses.  Normally such profits earned in foreign subsidiaries of U.S. companies would be subject to a tax rate of 35% if they were brought home, which is why the money had stayed parked in the tax havens. But the law gives companies a one-year window for the “repatriation” of this cash at a tax rate of only 5.25%. Nobody knows how much will be brought in. When the law was passed in October, the general expectation reportedly was that the figure would be about $135 billion.[15]  But one player has estimated it at $319 billion. “This has some investment bankers salivating,” wrote David Wells in the Financial Times.[16] But how much would be converted into dollars from other currencies? According to two different investment banks, the figure is somewhere around $100 billion.[17] That would be the minimum available from this source to pump the dollar for one year. Recall that the Exchange Stabilization Fund has less than half that for eternity.

The Bush administration’s use of repatriated foreign profits to pump domestic markets shows that they are not going to let “thin ice” signs stifle their version of the economy, at least not without a fight. However, the underlying weakness of the economy because of the twin deficits remains, so basically all that Bush and his Plunge Protection team are doing is moving the “thin ice” sign out onto thinner and thinner ice. The weight of the Bush team will eventually crash through that ice into exceedingly cold water.

But what about those drooling investment bankers? They will claim that this harvested money used in takeovers will eventually produce U.S. jobs, despite initial job losses due to the takeovers themselves. Investment bankers, who engineer many if not most takeovers, nearly always argue that the takeovers ultimately create jobs in the long term. The investment banks themselves, however, nearly always insist on being paid substantially in the short term through the transaction fees. Their employees, the investment bankers, are also substantially paid short term through annual salaries and bonuses. They get paid now; others can wait for the long term.

Panic Buying

One short-term thing the money has already done is to pump the dollar. The mechanism by which this is accomplished is quite simple and is signature Plunge Protection. It is the device of the short covering rally. This is what happens when speculators sell an asset—stocks, Treasuries or dollars—short. With stocks, this means that they sell the asset without actually owning it. They borrow the shares they sell, betting the stock will fall. They then buy it at the reduced price and return those shares. Another way to accomplish essentially the same thing is through options. The risk in a short sale is that the stock will not go down but instead go up. The short seller literally is exposed to unlimited losses in this case. This is the basis for a short covering rally.  Non-shorters buy in sufficient volume to force up the price. The price rise scares the shorters into buying right away before the price goes too high and they lose too much. This results in panic buying as large numbers of short sellers feel compelled to buy to limit their losses. Often when the stock market suddenly blasts up out of a long slide for little or no reason, we are watching a short covering rally.  There have been several such rallies in the currency and Treasuries markets so far this year, and there will probably be quite a few more.

According to a J.P. Morgan survey, the year 2005 began with most U.S. and international speculators holding short positions on U.S. bond markets.[18]  Obviously this is because they had foolishly looked at the underlying economic reality, and failed to understand the profound import of the American Jobs Creation Act. Most people were utterly unaware of it until at least January 13, when the U.S. Treasury, under whose direction the Plunge Protection team works, announced the specifics of what the grand skim could and could not be spent on. As noted, the list included stock market pumpers—takeovers.

The $100 billion (minimum) that will be brought in is not petty cash. One currency strategist at ABN Amro, Greg Anderson, has been quoted as saying, “The U.S. trade deficit is probably $600 billion in 2005, so this flow will be financing a sixth of the deficit all by itself.”[19] Thus this amount is clearly enough to have some impact on currency markets, especially if used to trigger short covering rallies.

Whatever is the actual amount that is brought in, it is exceedingly unlikely to be all brought in at about the same time. The companies have full discretion as to when to bring it in, and Plunge Protection is there to make sure they don’t do it at the wrong time. Various of the “ad hoc conference calls” referred to above by Secretary Snow could include fund managers and Chief Financial Officers of companies with chunks of cash lined up to bring in. Would this incestuous network of essentially insider traders be legal? It would be very difficult to prosecute without impeaching the President himself. As cited above, Section 2b of Executive Order 12631 states: “The Working Group shall consult, as appropriate, …  with major market participants to determine private sector solutions wherever possible. (emphasis added)” Obviously a major currency plunge is exactly what Plunge Protection is charged with avoiding.

The major market participants involved in these money pumping rackets would not only be making money, but would view each other as true patriots. They would simultaneously serve themselves and serve the national interest. And, if the story ever got out, they would be unlikely to serve any time. They would also get the reputation for being currency-timing geniuses. Each time they brought in cash from euros or pounds, the foreign currency subsequently fell. Their timing would appear impeccable. Never mind that they and some government officials are creating the timing.

How big are these chunks of cash? Johnson & Johnson announced in February that they would bring in $11 billion.[20] Pfizer put its planned figure at $37.6 billion.[21] But are these figures big enough to pump the dollar?  You bet. An ABN Amro currency strategist, Aziz McMahon, has been quoted as saying, “The sums are so large that if even a small proportion is transferred from other currencies, the positive impact on the dollar could be substantial.” According to that bank’s calculations, each $20 billion pumped in from other currencies pumps the dollar against a broad index of currencies about 1%.[22]  So the announced amounts would be sufficient to trigger both momentum trading in the dollar and trigger short covering rallies which themselves would trigger further momentum trading.

Even the announcements of the currency repatriations can trigger short covering rallies. ABN’s McMahon added, “The psychological impact a wave of announcements could have on structural short-dollar positions should also not be underestimated.”[23]

Just Printing Money to Pump Markets

Short covering rallies certainly played a role in the prolonged stock market run up which followed an initial Iraqi War bombing rally in March 2003. But there is more.A respected gold market analyst, Michael Bolser, has shown how the Fed quite simply pumped money into the markets during this period, with massive cash injections often timed at local stock market bottoms. His article, “Repurchase agreements and the Dow,” should be required reading for anyone who wants to understand rigged markets.[24] According to Bolser’s analysis, the Fed was simply flooding the economy with liquidity just before and during that rally. Using data available on the Fed website, Bolser plotted the injections of cash from the Fed when it bought Treasuries on the open market, which means buying them from the 22 banks that deal directly with the Fed. The simple buying of existing Treasuries by the Fed is called a “Permanent Open Market Operation” (POMO). By contrast, buying back a certificate with a specific repurchase (buy-back) date is called a “Temporary Open Market Operation” (TOMO). Bolser observes, “There were four closely spaced Permanent Open Market Operations just prior to the 1,000-point mid-March DOW launch. In addition, there was another POMO on March 13th of $710 Million coupled with a net TOMO injection of $3.25 Billion which resulted in a 303 point DOW gain on that day.”

Bolser also clarifies the relative market impacts of these cash injections: “Permanent Open Market Operations [POMOs] are usually much smaller in magnitude than Temporary operations but have a far greater effect on the market. Experts have suggested that there is a nine times market multiplier effect inherent in permanent open market operations.”

Stuffing Wads of Treasuries into Pension Fund Holes

But what about all those billions that are already parked in dollar denominated tax havens, such as Puerto Rico?  Among the Treasury Department permitted uses of the repatriated cash, is benefit plans, including pension benefits. Most of these plans are nowhere near recovery from losses suffered during the late 1990’s bubble. Normally, the repatriated money would go straight into the stock market, thus pumping it--except for one thing.  A number of companies do not have sufficient money in the reserves of their defined benefits pension funds to meet their contractual obligations to their retirees. If a pension fund goes broke, a federal agency, the Pension Benefit Guaranty Corporation (PBGC) takes on some of the obligations—typically pensioners collect 25 cents on the dollar. But the PBGC is itself broke, with companies defaulting or threatening to do so. For example, the PBGC has moved to take over the defined benefits pension funds of United Airlines.[25] And this is probably just the start of many such takeovers. By November 2004, the plans PBGC insured were under-funded $450 billion, an increase of $100 billion in just one year. Companies whose debt was evaluated at less than investment grade (a group that could soon include General Motors) were under-funded by $96 billion, an increase of $12 billion from the previous year.

So the PBGC could require another gigantic federal bailout, “Some have compared this to the savings and loan crisis of the early nineties,” said James Moore, who is in charge of pension products at a major bond fund, Pimco.[26]

But the U.S. government is also broke—because of Bush’s pro-war, anti-tax policy combination. Are there solutions? Sort of. One is just to fake the numbers, reducing the required reserves in these pension funds. Bush also plans to change the rules for investing for defined benefits pension plans in a way to reduce their likelihood of defaulting. Stocks can be down when pension payout demands are up. The right kind of bond could deliver the money at the right time. The new rules have not yet been announced, but seem certain to encourage the buying of Treasury Inflation Protected Securities (TIPS) by the depleted pension funds. Some funds are already jumping in to avoid even higher prices later. With the long dated TIPS pumped, the dollar looks less unattractive to Chinese and Japanese central banks and others. Masayuki Yoshihara, who manages, with others, over $9 billion at Japan’s fourth biggest life insurance company, Sumitomo Life Insurance Company, said “Pension funds will continue to be overweight the long-end of the curve. We expect the yield curve to flatten even more,” [27] What? Translating from finance-ese, he says that pension funds will keep buying long dated Treasuries, which will pump up their price and thus reduce their effective interest yield. (The interest is fixed, literally printed on the bond. So if buyers pay more to get the same printed interest rate, their effective yield goes down.) With long term interest rates falling and short term ones rising, the graph which represents these rates is becoming more and more of a flat straight line.

So there are a lot of relatively new sources of money for official manipulation of markets: federal contractor pension fund money, nicely insured under CAS; POMO and TOMO money, freshly printed by the Fed; the American Jobs Creation Act money, conveniently parked off shore; trading “partner” money, sometimes willingly given, sometimes extorted.

One nice thing about rigged markets is that they permit updating trite stock market axioms, such as “Buy on the rumor, sell on the news.” For Treasuries, this has now become, “Buy on the rumor, buy again on the news, and then sell it to the Chinese or Japanese central banks.”

All who imagine that the mythical market forces will prevail seem to deliberately avoid actually looking at what the so called markets really are, including their concentrations, Plunge Protection mechanisms, and Plunge Protection’s extensive access to a variety of pools of other people’s money.  The mechanisms and the market concentrations permit the Bush administration to systematically sell off U.S. assets to pay for its more wars/less taxes policies. The Bush administration is comparable to a group of corrupt trustees for the family fortune of a lazy and incompetent heir. They siphon the money out by selling off the inheritance while the heir is too stupid or drunk to notice. He still has his mansion, his fleet of big cars and his monthly check, and he doesn’t notice that the assets are shrinking. He may not for a while. This family’s fortune is big and there are a lot of assets still to sell off.

© 2005 Robert Bell

Robert Bell, Chairman of the Economics Department, Brooklyn College, N.Y., is the author of seven books, including: Beursbedrog (The Stock Market Sting), De Arbeiderspers, Amsterdam, 2003; Les peches capitaux de la haute technologie (The Capital Sins of High Technology), Seuil, Paris, 1998; Impure Science, Wiley, N.Y., 1992


[1]  See “The U.S. Government’s Bubble Blowing Machine.”
  “U.S. Dollar Becomes Dependent on Handful of Central Banks,” Financial Times, 24 January 2005, p. 2
  “Treasuries Drop Before U.S. Begins Auctioning $51 Billion of Debt,”, 8 February 2005
  “U.S. 10-Year Treasury Note Rises on Optimism For Tame Inflation,”, 7 February 2005
  “…aujourd’hui, les actionnaires sont cantonnes das un role de quasi-spectateur. Les petits actionnaires – que l’on appelle aujourd’hui << actionnaires individuals >> savent qu’ils ont peu de poids. Tous ensemble, ils ne representent  que quelques pour cent du capital car l’investissement des ménages est de plus en plus sous forme de Sicav, de fonds communs de placement ou d’assurance vie. Les acctionnaires, aujourd’hui, ce swont donc les investisseurs institutionnels.” (p. 187)
  “Nous ne sommes plus, en effet, dans le monde que l’on decrit dans les manuels d’economie, avec des investisseurs innombrables aux determinismes varies, choisissant chacun a sa maniere les titres qu’il va mettre en portefeuille – la resultante de leurs millions de decisions generant une sorte d’equilibre de marche changeant, mais stable ! La verite, c’est que, depuis quelques annees, l’investissement raisonne sur une valeur a presque disparue au profit de comportements de plus en plus mecaniques.” (p. 122)
  “$1.3 trillion deficits forecast over decade,” 25 January 2005
“Dollar Rises Versus Yen; Chin’s Zhou Says Yuan Not Undervalued,” 7 February 2005.
  “Koizumi puts markets in spin,” Financial Times, 11 March 2005, p. 1
  “Feisty Greenback Inches Ahead,” Financial times, 24 February 2005, p. 30
  “Central Banks Seek to Calm Dollar Fears,” Financial Times 24 February 2005, p.7
  “Dollar Has Weekly Decline on Concern Banks May Slow Purchases,” 26 Feb 2005
  “Russia Ends De Facto Dollar Peg and Moves to Align Ruble With Euro,” Financial Times, 6 Feb 2005
“Jusqu’a present, il s’agisait du grand pari adopte par la quasi unanimite des cambistes: le dollar baissera en 2005.”
  “U.S. Tax Amnesty Could Rake in $100 Billion,” Financial Times, 31 January 2005, p. 17
“Repatriated Cash Raises M&A Hopes,” Financial Times, 31 January 2005
  “U.S. Tax Amnesty Could Rake in $100 Billion,” Financial Times 31 January 2005, p. 17
  Andrew Coggan, “The Short View,” Financial Times 12 February 2005, p. 15
  “U.S. Tax Amnesty Could Rake in $100 Billion,” Financial Times 31 January 2005, p. 17
“Repatriated Cash Raises M&A Hopes,” Financial Times 2005
  “U.S. Tax Amnesty Could Rake in $100 Billion,” Financial Times, 31 January 2005, p. 17
  “Positive Signs For Dollar Emerge,” Financial Times,  21 January 2005, p. 28
  “Positive Signs For Dollar Emerge,”  Financial Times, 21 January 2005, p. 28
  “Battle over United pension plans heats up,” Financial Times, 12-13 March 2005, p. 8
“A Case of Pension Deficit Disorder,” Financial Times, 24 February 2005, p. 31
“Treasuries May Fall Amid Concern Demand Will Fall At Auctions,”, 9 February 2005
  Claude Bebear, Ils vont tuer le capitalism, Plon, Paris 2003, p. 186
  Claude Bebear, Ils vont tuer le capitalism, Plon, Paris 2003, p. 122 (translated from the French by R. Bell)
  “The Exchange Stabilization Fund: How It Works,” Economic Commentary, Federal Reserve Bank of Cleveland, December 1999

Two percent inflation and other official lies; an analysis that applies in many countries
Date: Thu, 07 Apr 2005 09:42:33 +0930 From: ERA <>
Relayed by: Doug Everingham <> Source:
globalnetnews-summary <>; Sunday, April 3,
2005 Web source:

This account of phony inflation figures resonates well with my experience in Adelaide, Australia. Our family has just been hit with an increase of 15% in health insurance costs, water rates by 15%, etc. Petrol prices continue to grow alarmingly. And at a time when the official inflation figure is still hovering at around 2%. -- John H.

Two percent inflation and other official lies

According to official government statistics, the Consumer Price Index (CPI) [ the mostly widely used measure of inflation ] is running a very low 2.2% a year. But if inflation is so low, why is the price of everything you buy going up so fast? How do you reconcile 2% inflation with 10% to 20% annual increases in housing prices . . . 25% to 40% increases in heating bills during the past winter . . .and double-digit increases in the price of nearly everything you consume, from gasoline, to food, to movie tickets?

The simple answer is that the official inflation rate is virtually pure fiction,
and has been for decades.

Thirty years ago, when I took my first college economics class at the University of Maryland, my professor explained why he quit his job at the Commerce Department. He was hired to write economic forecasts based on the best available information. Yet time and again, when he sent in his report, his bosses sent them back to him to be re-written with more "positive" figures. After this happened repeatedly, it became clear to him that there was no way he could honestly do his job.

For a very long time, the accuracy of government economic figures has been going straight downhill. As John Williams, head of Shadow Government Statistics, explains: . During the Kennedy administration, unemployment was redefined with the concept of 'discouraged workers' to reduce the unemployment rate. . "If Lyndon Johnson didn't like the growth that was going to be reported in the GNP, he sent it back to the Commerce Department, and he kept doing so until
Commerce got it right. . "The Carter administration was caught deliberately understating inflation.
. "The first Bush Administration began efforts at the systematic reduction of the reported rate of CPI inflation.

. "The current Bush administration has expanded upon the Clinton era ... setting the stage for the adoption of a new and lower-inflation CPI."

Why Government Wants to Keep the CPI Low

Williams estimates the current real consumer inflation rate is closer to 6% than 2%. Other research services, like free market Agora Research, now put the real inflation rate at 7%-8%.

There are many reasons why it is in the government's interest to make the inflation seem lower than it actually is: First and foremost, it saves them billions of dollars. For instance, cost of living adjustments in Social Security, welfare payments, Medicare and other entitlements are based on changes in the CPI. Similarly, keeping the official CPI rate low, keeps salary and pension adjustments for government employees and retirees much lower than they would otherwise be. A low official CPI also helps keep down interest payments on the national debt (which now consumes over 20% of all government expenditures). It also keeps down the cost of government borrowing, which is now over $1 trillion a year ; a lot of money even for the federal government.

How the official inflation rate is manipulated

There are in fact many ways in which the government manipulates economic information to keep the CPI artificially low:

1. Geometric Weighing: Elimination of good and services that are going up rapidly from the CPI. Goods and services that are increasing most rapidly [ such as housing and energy costs ] are given a lower weight in calculating the CPI, or even eliminated from it entirely! The public rationale for this blatant sleigh-of-hand is that such goods and services are "too volatile" to be included or that increases are "temporary" and atypical. However, with such manipulation, the CPI ceases to have any connection to reality. Depending upon how "volatile" goods are geometrically manipulated, the official inflation rate can become any figure the government wants it to be, with little connection to reality.

2. Hedonic Adjustment: Explaining away price increases as quality improvements. For instance, if the price of a computer goes up by $100 this price increase will not be included in the CPI if (as is usually the case) there is also some improvement in the capabilities of the computer. Using this type of fake adjustment, it's clear that cars have not "really" increased in price at all from the days when Henry Ford sold a Model T for $300.

3. Ignoring quality decreases. If we need to adjust the inflation rate for quality increases, don't we also need to adjust it for quality decreases? The post office provides a good example. Sixty years ago, first-class postage was just three cents. But back then, the post office made four deliveries each day, two regular and two special. Also, sixty years ago, gas stations had attendants who pumped your gas for you, checked your oil, and cleaned your car windshield at no additional charge. And movie theaters had ushers who took you to your seats. I won't even comment on what has happened to service at U.S. airports since 9/11.

Not factoring in such quality decreases [ which can be dramatic even in a short
period of time ] also greatly understates inflation.

4. Assuming consumers will simply turn to less-expensive alternatives. Thus if the price of a steak dinner at a restaurant goes from $19.95 to $24.95, the Department of Commerce simply assumes diners will go to a less expensive restaurant, keeping their meal costs the same. Like other CPI adjustments, this assumption has little to do with reality and is in the end simply an excuse for manipulating official inflation figures.

5. Exclusion of goods and services whose price is reduced by government subsidies. For instance, the actual cost of a subway ride in New York City is anywhere from $3.50 to $6.00, but riders only pay $1.25. The rest is subsidized by taxes. But since only the price of a subway ride (and not its actual cost) appears in official price reports, the CPI again appears much lower than it actually is. Thousands of goods and services in the U.S. are now subsidized by government, including airport security, public schools, medical care, housing for the poor, the interstate highway system, and much of what you eat.

Considering the above list, 7% may be much too low an estimate for the present, real U.S. inflation rate.

Economic consequences of manipulating the CPI

The blatantly false official consumer price index has many harmful consequences for both individuals and our economy as a whole. First and foremost it causes everyone from individuals to corporations to government to overspend, thanks to artificially low (and unsustainable) interest rates and easy credit. You can see this everywhere in our society today, from home buyers "qualifying" for loans they can't really afford, thanks to artificially low interest rates . . . to home owners who use their artificially-inflated home equity as an ATM . . . to the federal government's current binge of deficit financing.

With foreign central banks buying less and less U.S. debt, and complaining about low interest payments, the bust is now not far off and could begin by the end of this year ? potentially devastating stocks, bonds, businesses, and jobs.

The Party is About to End

Fed Chairman Alan Greenspan has announced a few months ago that he would be increasing the prime federal funds rate by more this year than he did last year (2.25 %). That will mean the end of the days of easy mortgages for all and unrestrained spending. It could even push the real inflation rate from 7% to 10%+. Such high inflation rates could cause other countries to abandon the dollar and U.S. debt like a hot potato, and in turn trigger a major U.S. recession.

However, not to worry. No matter how high interest rates go and no matter how many people lose their jobs, the "official government inflation rate" will still probably be well under 3%.####

"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens..... Lenin was certainly right."   - John  Maynard  Keynes