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Fed Launches the Most Fraudulent Market Manipulating Scheme Yet

Interest-Rates / Market Manipulation Apr 29, 2011 - 04:07 AM GMT

By: Dr_Jeff_Lewis

Interest-Rates

Best Financial Markets Analysis ArticleThe Federal Reserve is up to its fraudulent games.  In this latest round of open market operations, the Federal Reserve is not only engaging in manipulation of the credit default swap market, but also paying off its allies in the ultimate scam of creating low-risk, high returns for hedge fund managers.


Recently, it was found that the Federal Reserve has been issuing put options on US Treasuries, essentially underwriting Treasury debt, and telling the market that there is no risk in buying US Treasuries.

Fraud is Cheap

To persuade the market that US Treasury securities are worth owning, the Federal Reserve need not spend the trillions it spent to push the price of US Treasuries up and yields down.  In fact, the best fraud is in making mincemeat of what should be efficient markets: the risk pricing markets.

The Federal Reserve is now actively selling puts against US Treasury debt obligations.  The result for the Fed is that it makes money when the US does pay on its debt and when US Treasury rates do not increase.  We could stop right there, realizing that this is actually a bet on the quality of US Treasuries and does not have any significant conflict of interest—except that it necessarily conflicts with the financial markets.

Manipulating Markets

Moving the options market is easy; it requires only a few million dollars, and it can be done discretely in what is ordinarily a very light-volume market.

Let’s take a look at a popular Treasury ETF: the iShares Lehman 7-10 Yr Treas. Bond ETF (IEF).  This bond fund has some $2.5 billion in US Treasury assets, and it is one of the largest Treasury ETFs.  However, while the ETF has many active traders working to ensure it accurately tracks the changes in the price of US Treasuries, its options are relatively inactive.

Looking at the next month option contracts, June calls look relatively boring; there is open interest of roughly 3000 call contracts.  All is well, right?  Wrong.  In looking further into puts, you’ll soon realize the obvious fraud: there are more than 27,000 puts in open interest, nine times more than the amount of calls. 

Someone—the Fed—is selling an obscene amount of insurance against US Treasuries.  They’ve sold several times more puts, a protective bet, for anyone who might possibly want them and done so to such a degree that protection for US Treasuries is disgustingly cheap.  Look at it yourself; the fraud is as obvious as obvious can be. 

Go out to the January 2012 options, and you’ll find even more puts sold at the price just below the current offering—that’s the Fed saying that US Treasuries are safe as can be!

Why the Fed Sells Puts

Puts on exchange-traded funds are the best way to show the market that Treasuries are risk-free.  By selling puts, the price for protection plummets, and banks can essentially borrow from the Fed at 0%, and lend to the US Treasury at 4%, all risk-free.

So why does the Fed target ETF options?  This is easy to answer: the world of finance uses ETF options to price risk on the derivatives market.  The Black Scholes options formula, which is used across the world to price risk, assumes that the options market provides for no arbitrage, which is just another backwards way of saying that the options markets are a free, efficient market.  The options markets obviously aren’t, the Fed is playing with them.

What happens now?  Well, the insurance companies around the world who write insurance, or credit-default swaps against US government paper, use the data of the options market to price trillions upon trillions of dollars of insurance derivatives.

In effect, the Federal Reserve can sell less than 100,000 puts against all Treasury ETFs for no cost, assuming they are never paid out, and force the derivatives market to issue trillions of dollars in insurance at below the real, risk-adjusted rate.

Where Hedge Funds Come in

Remember the Fed’s open borrowing window through which it lent billions of dollars to hedge funds?  It’s all starting to make sense why they did it.

Hedge funds are called hedge funds for a reason; they hedge their bets and use arbitrage techniques to make a killing on Wall Street.  What’s the best arbitrage out there?  Buying US Treasuries with money you pay zero-interest on for a positive return with other people’s money, then insulating yourself from every iota of risk by purchasing underpriced, manipulated put options and credit default swaps.

In short, the Fed is making every American poor, every banker rich, and every investor a pawn in the largest scam to ever hit the financial world.  Tell your neighbors, colleagues, friends, and acquaintances that there is no bigger scam than that which is permeating through the financial world and the sealed books of the Federal Reserve System.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

sc
29 Apr 11, 13:39
I disagree

I disagree with you. The mistake you and many other people make is you assume that the Fed is some stand alone institution that should never interfere with the market.that in fact the arket has a right to do whatever pleases because it is somehow super efficient.

Mow let's just step back and start at the beginning.

The Fed has a dual mandate it is supposed to pursue.Now let's forget for the moment that we might interpret that mandate and arrice at different priorities because that is not the issue. The fact is they do have a dual mandate and they do have a plan of their choosing for trying to achieve it.Without a doubt part of achieving their plan is to use any means at their disposal.Within their plan I have no doubt that keeping bond yields down and doing so without bankrupting themselves in the process plays a major part. So why do you think they cannot use options to achieve that the outcome they are looking for? Do you think it benefits them or the economic plan they are trying to put into place to simply allow Mr Market to trample all over them.

Actually the only stupid thing to do is to be on the wrong side to them because it will cost you.


Paul_B
30 Apr 11, 11:37
Taking the road less travelled....

"sc" said: Actually the only stupid thing to do is to be on the wrong side to them because it will cost you.

Seriously, I take entirely the opposite view from yours. Being foolish enough to *believe* anything these liars and thieves tell you will cost you dearly. For the last 20 years, part of my investment strategy has been to be a contrarian. I always assume these bastards are out to get me and take my positions accordingly. It might sound cynical, but it's a tactic that has served me remarkably well indeed over the years. If you're daft enough to take all the crap these people spout at face value, you face a future of guaranteed poverty. Simple as that.


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