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Silver Lining to U.S. Corruption

Politics / Market Regulation Apr 17, 2010 - 05:45 AM GMT

By: Jennifer_Barry


Best Financial Markets Analysis Article   Many Americans believe that their government is incompetent, but it’s actually corrupt. Transparency International defines corruption as “the abuse of entrusted power for private gain.” Crony capitalism, sweetheart deals, lucrative post-government jobs, and campaign contributions in exchange for votes: these are all examples of corruption.

   I don’t believe this corruption is inherent in American culture. After all, the US has venerated whistleblowers from Upton Sinclair’s exposé of the meat packing industry in the early 20th century, to Woodward and Bernstein’s reporting on Watergate in the 1970s. US citizens aren’t regularly subject to demands for bribes from local officials or business leaders. Instead, this corruption comes from the top down.

   Many Americans began 2009 with great hope, as new President Obama promised “change” in Washington. Instead, the US public was the victim of bait and switch, getting even “more of the same,” as Gerald Celente puts it. Obama continued Bush’s policies, with more war, more torture, and more bailouts. He even kept poor performers from the last Administration like Secretary of Defense Robert Gates. To add insult to injury, Obama exiled his more progressive economic team, and swapped them for Clinton era retreads like Larry Summers who helped cause the current financial crisis. This indicates that the differences between the two political parties are tiny, and mostly cosmetic.

   Congress has a 23% approval rating from the American public, as it is widely believed to be for sale to the highest bidder. After all, Senator Burris was suspected of purchasing his appointment to Congress from disgraced former Illinois Governor Blagojevich, who has been charged with soliciting bribes and conspiring to commit mail and wire fraud. Senator Dodd decided not to run for re-election due to voter outrage over his sweetheart loan from scandal plagued Countrywide Financial, as well as his support of the massive TARP bailout in 2008. Many legislators from both parties have been investigated for using earmarks for personal benefit, ignoring the best interests of the general public.

   The congressional debate over the health care bill was emblematic of the disconnect between legislators and the American people. Back room deals and coercion were used to acquire the requisite votes. Even so, Speaker Pelosi expected blind trust about the purity of congressional intentions, stating that “we have to pass the bill so that you can find out what is in it." Once it was signed by President Obama and many shortcomings were exposed, the popularity of medical reform fell more than 10% to 39%.

Bankers Rig the System

   The rot is clearly centered in the financial sector. As former IMF chief economist Simon Johnson wrote last May in his brilliant article, “The Quiet Coup,” ( the financial oligarchy controls the policies of the U.S. government, and no substantial reform can happen until the bankers lose their power. Major banks contributed to both presidential campaigns, and received hefty TARP subsidies worth many multiples of their “donations.” Economic adviser Summers received millions from these institutions in speaker’s fees in 2009, insuring his continued support. This is why most of the 2008 bailouts - including the Term Auction Facility, the AIG loans, the Freddie and Fannie backstop, and the auto company loans -  continue to this day. Although the bank bailouts were presented as necessary to prevent a financial meltdown, the “too big to fail” were allowed to become even larger and more powerful!

   One of the standard bearers for institutionalized corruption is Goldman Sachs. This mega-bank, often called “Government Sachs,” influences policy at the highest level. It makes huge profits through cheating, manipulating markets from oil to wheat. In addition to inside information, its software front runs trades, stealing pennies on every transaction. Goldman acts with impunity, knowing its alumni sit in key positions at the SEC and CFTC.

   Goldman has its tentacles deep in “climate change” as well. With its former employees advising the Obama Administration, GS can influence the US government to commit to CO2 emission reduction. The bank is connected to Dr. Pachauri, head of the UN Intergovernmental Panel on Climate Change, through their common financial interest in the Chicago Climate Exchange. This proposed exchange would profit from fees on carbon trading, an activity that is up to 90% fraudulent in the EU.

   This bank also helped create the mortgage crisis by making risky loans, then bundling the bad debt and selling it in the form of CDOs. Goldman Sachs attempted to earn even higher profits by shorting these toxic instruments. When AIG was not able to pay the “insurance” Goldman purchased for these CDOs, the US government bailed out AIG, allowing the financial institution to recoup 100% of its potential losses. After all that fraud and deception, the CEO of GS has the incredible arrogance to claim the bank is “doing God’s work.”

   Goldman is far from alone in its pillaging of America's wealth. In Matt Taibbi's excellent article, “Looting Main Street,” ( he details how JPMorgan Chase repeatedly ripped off Jefferson County, Alabama through systemic bribery and deceit. Under the guise of upgrading the sewer system, the bank accomplished a “a billion-dollar predatory swap deal.” While many local officials have been convicted, the bankers who profited handsomely have been left untouched. JPMorgan Chase received a paltry $25 million fine from the SEC, who also rolled back some of the outrageous fees, but the county is still burdened with a huge debt.

   Last month there was a new revelation about sordid activities at the failed Lehman Brothers bank. According to bankruptcy examiner Anton Valukas, Lehman indulged in balance sheet chicanery to decrease its apparent leverage in order to make their financial reports look artificially better. The bank used “Repo 105” transactions which require the institution to repurchase its sold assets later, but instead Lehman fraudulently booked them as simple sales without noting any further obligations. Lehman used other ruses to deceive shareholders as well, like its secret relationship with a small company, Hudson Castle, which Lehman used to shift liabilities off its official books. This scandal could spread in the next few months, as Valukas' report indicates that members of the SEC and the NY Federal Reserve branch – then headed by Timothy Geithner – knew of this deception yet did not expose it. ( A recent investigation by the Wall Street Journal found that 18 major banks including Citigroup and Bank of America similarly doctor their books just prior to public releases.

Regulatory Theater

I am not hopeful that regulatory bodies will create any real reform. Years of official hearings, investigations and new  agencies have made me skeptical that the power of financial institutions will be limited. Instead, the US gets “regulatory theater” where politicians speak earnestly into the camera, and a few scapegoats like Madoff are punished without addressing underlying problems.

For example, I don't believe that the March CFTC hearings on precious metals will create significant regulatory change, despite the apparent good intentions of Commissioner Bart Chilton. The hearings focused on the question of position limits, but this is a less important side issue. The true distortion of these markets is caused by certain large banks which claim to be hedgers so they don't have to abide by these limits. These institutions can overwhelm markets with their outsized positions and move the price to whatever level generates a profit for them. In the past, two banks have held 99% of the net short position in silver, a clear manipulation. (

   In effect this maneuver suppresses the price, because the regulators don't allow a similar concentration on the long side. A repeat of the tactics of the Hunt Brothers would suffer harsh punishment. Even some long index funds such as UNG and DBA lost their exemptions to position limits last year. In contrast, Goldman Sachs' instrument, the iShares S&P GSCI Commodity-Indexed Trust, was spared from jettisoning its contracts since it was allowed to keep its exemptions to position limits.

   Nevertheless, I have hope for major changes in the precious metals markets, regardless of the actions or inactions of the CFTC. Now that the story of precious metals manipulation is spreading worldwide, the end of this fraud is inevitable. Big money  - sovereign nations and hedge funds like Greenlight Capital – are buying metal and demanding delivery. This process will only snowball. Every story of delays in delivery, tungsten filled bars, and reports that vaults are near empty will bring dozens more investors to demand their gold and silver. As Jeffrey Christian admits to approximately a 100-1 leverage on the LBMA, the supply will not be sufficient to satisfy everyone who wants bullion. This will precipitate an unprecedented short squeeze as investors scramble to get physical bullion.

   Don't be left without a seat when the music stops. Make sure you have actual metal by verifying your allocated storage or holding it personally. When banks and exchanges default, those with certificates or pool accounts will find their settlement is a pile of swiftly depreciating fiat money, not the bullion they desired.

by Jennifer Barry

Global Asset Strategist

Copyright 2010 Jennifer Barry

Hello, I'm Jennifer Barry and I want to help you not only preserve your wealth, but add to your nest egg. How can I do this? I investigate the financial universe for undervalued assets you can invest in. Then I write about them in my monthly newsletter, Global Asset Strategist.

Disclaimer: Precious metals, commodity stocks, futures, and associated investments can be very volatile. Prices may rise and fall quickly and unpredictably. It may take months or years to see a significant profit. The owners and employees of Global Asset Strategist own some or all of the investments profiled in the newsletter, and will benefit from a price increase. We will disclose our ownership position when we recommend an asset and if we sell any investments previously recommended. We don't receive any compensation from companies for profiling any stock. Information published on this website and/or in the newsletter comes from sources thought to be reliable. This information may not be complete or correct. Global Asset Strategist does not employ licensed financial advisors, and does not give investment advice. Suggestions to buy or sell any asset listed are based on the opinions of Jennifer Barry only. Please conduct your own research before making any purchases, and don't spend more than you can afford. We recommend that you consult a trusted financial advisor who understands your individual situation before committing any capital.

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