Extra! Extra! Feds Bail Big Silver Short, CFTC Sees No Evil
Stephen Kovaka, CPA
November 17, 2008
WHERE’S THE OUTRAGE?
Gone are the days, if they ever were, when a watchdog press would dig out this story and splash it across the headlines in outrage. Instead, we have a private citizen to thank, who troubled to write his congressman, a CFTC official who guardedly alluded to the facts in his reply to the congressman’s inquiry, and silver analyst Ted Butler, who put the pieces of the puzzle together. In fact Butler had already put the pieces together back in a September article, before the CFTC letter that confirmed his suspicions was even written.
This story is more than a footnote. It is, as Butler says, a multi-billion dollar crime in progress. It is also critical to understanding what has happened to the American economy in 2008, and the path our federal government has taken to get us here.
The story begins in late 2007, when investment bank and big-time trader Bear Stearns (BS) announced fourth quarter losses of $854 million. In fact, Bear Stearns was in the news as far back as June, 2007, when some BS subsidiary hedge funds began to get into trouble. At that time it was BS that was going to do the bailing.
What was NOT reported to the public, then or later, was that Bear Stearns was almost certainly the single largest CRIMEX silver short, with over 30,000 contracts, equal to roughly 25% of annual world production. By March, silver prices had passed $20/oz., and the BS silver short position was deeply underwater. It was at exactly this time that JPMorgan Chase suddenly acquired BS for $2 per share, along with receiving USG guarantees of up to $30 billion (some say $55 billion, but I doubt the government will quibble with JPMC over a few billions) on some BS “hard to value” assets. Obviously, the huge, losing silver short position was one of those so-called assets.
CFTC SEES NO EVIL
The ironic motto of the US Commodity Futures Trading Commission (CFTC) is “Ensuring the Integrity of the Futures and Options Markets”. Now imagine that you are Walter Lukken, CFTC Chairman, or CFTC Inspector General A. Roy Lavik or Commissioners Michael Dunn, Bart Chilton, and Jill Sommers. You are charged with regulating the commodity futures markets of the United States, preventing market manipulation, and prosecuting futures and options trading wrongdoing. Yet, you have allowed this enormous short position to be accumulated by one investment bank. You are well aware that only this permanent short position has prevented the price of silver from rising much higher than $20. You know that BS is incapable of delivering more than a tiny fraction of the silver they have sold. You know that any attempt to buy back such an enormous position would send the price of silver to record heights. Yet somehow, you take no action to liquidate the BS short, not even when BS is in the news for months with serious losses and doubts about its viability. By your inaction, you have allowed the entire CRIMEX silver futures market to become a hostage to the fortunes of BS, contrary to the very motto of your organization.
There is an old joke, wherein if you owe the bank $10,000, that is your problem, but if you owe the bank $10 billion, that becomes the bank’s problem. In the same way, the CFTC had never established and policed realistic position limits, thereby enabling one big player to become a threat to the market as a whole. Why would the CFTC allow this to happen? There is only one possible reason: a massive, permanent short interest was required to prevent silver prices from rising. But controlling market prices is certainly not the proper job of the CFTC. On the contrary, their job is to see that NO ONE is allowed to control market prices! The logical conclusion is that the CFTC knew that other players higher up in the US government wanted them to keep their hands off of the BS silver position.
Why should the United States government care so much about the price of silver? Because they have been using silver as a choke collar to help hold down the price of gold, the only serious competitor to their badly compromised US dollar franchise.
DID THEY SLIP, OR WERE THEY PUSHED?
The demise of BS happened almost overnight. The story has generally been publicized as an early episode of the popular and long running soap opera, “Nobody Saw It Coming”. BS was taken down by a lone gunman - Whoops! I mean to say, “Suddenly, unfounded rumors destroyed a major Wall Street investment bank”. Poof! End of story. Believe as much of that as you like, but SOMEBODY certainly saw it coming:
On March 10, 2008, the closing price of Bear Stearns was 70. The stock had traded at 70 eight weeks earlier. On or prior to March 10, 2008 requests were made to the options exchanges to open new April series of puts with exercise prices of 20, and 22.5, and a new March series with an exercise price of 25.
Their requests were accommodated and new series were opened for trading March 11, 2008. Since there was very little subsequent trading in the call with exercise prices of 20, 22.5 or 25, it is certain that the requests were made with the intentions of buying substantial amounts of the puts. There was, in fact, massive volumes of puts purchased in those series which opened on March 11, 2008. For example: between March 11-14 inclusive, there were 20,000 contracts traded in the April 20s, 3700 contracts traded in the April 22.5s, and 8000 contracts traded in the April 25s. In the March 25s, there were 79,000 contracts traded between March 11-14, 2008.
Question: Why did the options exchanges not open the far out of the money puts for trading the first time that Bear Stearns stock hit 70, when the April and March options had far more time to expiration? Certainly if the requesters were legitimate hedgers or speculators, their buying the March and April puts with 2 and 3 months to expiration was more reasonable.
Answer: The insiders were not ready to collapse the stock and did not request the exchanges to open the new series when Bear Stearns first hit 70.
From “Bear Stearns Buyout – 100% Fraud” by John Olagues
Subsequently, millions of dollars worth of these super-low priced puts were bought just days before expiration, in anticipation of the BS stock price falling off a cliff. Of course, the sellers of the puts protected themselves by massively shorting the underlying BS stock, and suddenly BS was history.
But wait! Even as these “unfounded rumors” took down BS in the blink of an eye, JPMorgan Chase was right there ready and waiting to take over BS at $2 per share, and the US Government was right there ready and waiting to provide tens of billions of dollars in sweeteners for JPMC. By March 17th, it was a done deal, all handled behind closed doors.
CFTC: PROBLEM SOLVED – FOR NOW
What we did not learn until August was that a gigantic BS short position in silver had been transferred to JPMC as part of the BS takeover, maybe even as one of the major reasons for the takeover. It is all too easy to imagine the drones at the CFTC HQ being told by winks and nods from the top dogs at Treasury not to worry about the absurdly outsized BS silver short position threatened with bankruptcy – All Has Been Arranged. If your big, market controlling short runs out of juice, just bring in another even larger, even more politically well connected player to secretly take over the position without the need for unwinding it. No muss, no fuss, and most importantly – No Publicity!
Ted Butler, in his most recent piece, also points out a government report (See Table 9) revealing that JPMC just happened to also hold $10.9 BILLION in precious metals derivative contracts – more than any other bank – and I seriously doubt that they were massively long. They certainly did not want to see the BS silver short position rapidly unwound. With the US government as a partner in the BS takeover, and taxpayers footing the bill, is it any surprise that JPMC was able to cut the price of silver in half over the next 3 months and rescue their short positions? Tipped off in advance, the toothless CFTC watchdogs again saw no evil as the country’s largest financial player took control of the silver market and smashed it, even as supplies of silver dried up around the world. In later news, supplies of silver are falling even further as mining companies lay off workers and cut back on exploration and development of new mines.
CONCLUSIONS
As Chris Powell of GATA succinctly puts it, there are no free markets anymore, just interventions. Markets have become deceptive facades, behind which government/industry cartels are allowed to set prices and control outcomes, while looting the unwary who still believe in the supremacy of market forces. Unfortunately, too many Americans are willing to accept this as the price of delaying a little longer the day of economic reckoning. Economics is now a mere lodger in the house of politics, and silver is only one case study demonstrating this general principle. But sadly, government cannot prevent undesirable economic outcomes, only delay them, and at a terrible cost. The only real cure for high prices is high prices, which call forth greater production. By crushing the price of silver, the US government and JPMC are delaying the day of reckoning for the US dollar, but at the cost of damaging the mining industry and diminishing the already minimal supplies of silver. Now we are seeing de facto rationing of available silver to industrial users over investors at these low prices. The day of industrial silver shortages is rapidly approaching, thanks to the criminal policies of the US government/banking
contact information
Stephen Kovaka, CPA | Corydon, IN USA | Email
www.financialsense.com/fsu/editorials/2008/1117.html