Manipulation: How Markets Really
by Stephen Lendman
Wall Street's mantra is that markets move
randomly and reflect the collective wisdom of investors. The truth
is quite opposite. The government's visible hand and insiders
control markets and manipulate them up or down for profit - all
of them, including stocks, bonds, commodities and currencies.
It's financial fraud or what former high-level
Wall Street insider and former Assistant HUD Secretary Catherine
Austin Fitts calls "pump and dump," defined as "artificially
inflating the price of a stock or other security through promotion,
in order to sell at the inflated price," then profit more
on the downside by short-selling. "This practice is illegal
under securities law, yet it is particularly common," and
in today's volatile markets likely ongoing daily.
Why? Because the profits are enormous,
in good and bad times, and when carried to extremes like now,
Fitts calls it "pump(ing) and dump(ing) of the entire American
economy," duping the public, fleecing trillions from them,
and it's more than just "a process designed to wipe out the
middle class. This is genocide (by other means) - a much more
subtle and lethal version than ever before perpetrated by the
scoundrels of our history texts."
Fitts explains that much more than market
manipulation goes on. She describes a "financial coup d'etat,
including fraudulent housing (and other bubbles), pump and dump
schemes, naked short selling, precious metals price suppression,
and active intervention in the markets by the government and central
bank" along with insiders. It's a government-business partnership
for enormous profits through "legislation, contracts, regulation
(or lack of it), financing, (and) subsidies." More still
overall by rigging the game for the powerful, while at the same
time harming the public so cleverly that few understand what's
Market Rigging Mechanisms - The Plunge
On March 18, 1989, Ronald Reagan's Executive
Order 12631 created the Working Group on Financial Markets (WGFM)
commonly known as the Plunge Protection Team (PPT). It consisted
of the following officials or their designees:
-- the President;
-- the Treasury Secretary as chairman;
-- the Fed chairman;
-- the SEC chairman; and
-- the Commodity Futures Trading Commission
Under Sec. 2, its "Purposes and Functions"
were stated as follows:
(2) "Recognizing the goals of enhancing
the integrity, efficiency, orderliness, and competitiveness of
our Nation's financial markets and maintaining investor confidence,
the Working Group shall identify and consider:
(1) the major issues raised by the numerous
studies on the events (pertaining to the) October 19, 1987 (market
crash and consider) recommendations that have the potential to
achieve the goals noted above; and
(2)....governmental (and other) actions
under existing laws and regulations....that are appropriate to
carry out these recommendations."
In August 2005, Canada-based Sprott Asset
Management (SAM) principals John Embry and Andrew Hepburn headlined
their report on the US government's "surreptitious"
market interventions: "Move Over, Adam Smith - The Visible
Hand of Uncle Sam" to prevent "destabilizing stock market
declines. Comprising key government agencies, stock exchanges
and large Wall Street firms," this group "is significant
because the government has never admitted to private-sector membership
in the Working Group," nor is it hinting that manipulation
works both ways - to stop or create panic.
"Current mythology holds that (equity)
prices rise and fall on the basis of market forces alone. Such
sentiments appear to be seriously mistaken....And as official
rhetoric continues to toe the free market line, manipulation has
become increasingly apparent....with the active participation
of selected investment banks and brokerage houses" - the
Wall Street giants.
In 2004, Texas Hedge Report principals
Steven McIntyre and Todd Stein said "Almost every floor trader
on the NYSE, NYMEX, CBOT and CME will admit to having seen the
PPT in action in one form or another over the years" - violating
the traditional notion that markets move randomly and reflect
Worse still, according to SAM principals
Embry and Hepburn, "the government's unwillingness to disclose
its activities has rendered it very difficult to have a debate
on the merits of such a policy," if there are any.
Further, "virtually no one ever mentions
government intervention publicly....Our primary concern is that
what apparently started as a stopgap measure may have morphed
into a serious moral hazard situation."
Worst of all, if government and Wall Street
collude to pump and dump markets, individuals and small investment
firms can get trampled, and that's exactly what happened in late
2008 and early 2009, with much more to come as the greatest economic
crisis since the Great Depression plays out over many more months.
That said, the PPT might more aptly be
called the PPDT - The Plunge Protection/Destruction Team, depending
on which way it moves markets at any time. Investors beware.
Manipulating markets is commonplace and
as old as investing. Only the tools are more sophisticated and
amounts involved greater. In her book, "Morgan: American
Financier," Jean Strouse explained his role in the Panic
of 1907, the result of stock market and real estate speculation
that caused a market crash, bank runs, and hysteria. To restore
confidence, JP Morgan and the Treasury Secretary organized a group
of financiers to transfer funds to troubled banks and buy stocks.
At the time, rumors were rampant that they orchestrated the panic
for speculative profits and their main goals:
-- the 1908 National Monetary Commission
to stabilize financial markets as a precursor to the Federal Reserve;
-- the 1910 Jekyll Island meeting where
powerful financial figures met in secret for nine days and created
the private banking cartel Federal Reserve System, later congressionally
established on December 23, 1913 and signed into law by Woodrow
Morgan died early that year but profited
hugely from the 1907 Panic. It let him expand his steel empire
by buying the Tennessee Coal and Iron Company for about $45 million,
an asset thought to be worth around $700 million. Today, similar
schemes are more than ever common in the wake of the global economic
crisis creating opportunities to buy assets cheap by bankers flush
with bailout cash. Aided by PPT market rigging, it's simpler than
Wharton Professor Itay Goldstein and Said
Business School and Lincoln College, Oxford University Professor
Alexander Guembel discussed price manipulation in their paper
titled "Manipulation and the Allocational Role of Prices."
They showed how traders effect prices on the downside through
"bear raids," and concluded:
"We basically describe a theory of
how bear raid manipulation works....What we show here is that
by selling (a stock or more effectively short-selling it), you
have a real effect on the firm. The connection with real value
is the new thing....This is the crucial element," but they
claim the process only works on the downside, not driving shares
In fact, high-volume program trading,
analyst recommendations, positive or negative media reports, and
other devices do it both ways.
Also key is that a company's stock price
and true worth can be highly divergent. In other words, healthy
or sick firms may be way-over or under-valued depending on market
and economic conditions and how manipulative traders wish to price
them, short or longer term.
The idea that equity prices reflect true
value or that markets move randomly (up or down) is rubbish. They
never have and more than ever don't now.
The Exchange Stabilization Fund (ESF)
The 1934 Gold Reserve Act created the
US Treasury's ESF. Section 7 of the 1944 Bretton Woods Agreements
made its operations permanent. As originally established, the
Treasury ran the Fund outside of congressional oversight "to
keep sharp swings in the dollar's exchange rate from (disrupting)
financial markets" through manipulation. Its operations now
include stabilizing foreign currencies, extending credit lines
to foreign governments, and last September to guaranteeing money
market funds against losses for up to $50 billion.
In 1995, the Clinton administration used
the fund to provide Mexico a $20 billion credit line to stabilize
the peso at a time of economic crisis, and earlier administrations
extended loans or credit lines to China, Brazil, Ecuador, Iceland
and Liberia. The Treasury's web site also states that:
"By law, the Secretary has considerable
discretion in the use of ESF resources. The legal basis of the
ESF is the Gold Reserve Act of 1934. As amended in the late 1970s....the
Secretary (per) approval of the President, may deal in gold, foreign
exchange, and other instruments of credit and securities."
In other words, ESF is a slush fund for
whatever purposes the Treasury wishes, including ones it may not
wish to disclose, such as manipulating markets, directing funds
to the IMF and providing them with strings to borrowers as the
Treasury's site explains:
"....Treasury has often linked the
availability of ESF financing to a borrower's use of the credit
facilities of the IMF, both to support the IMF's role and to strengthen
assurances that there will be timely repayment of ESF financing."
The Counterparty Risk Management Policy
Established in 1999 in the wake of the
Long Term Capital Management (LTCM) crisis, it manipulates markets
to benefit giant Wall Street firms and high-level insiders. According
to one account, it was to curb future crises by:
-- letting giant financial institutions
collude through large-scale program trading to move markets up
or down as they wish;
-- bailing out its members in financial
-- manipulating markets short or longer-term
with government approval at the expense of small investors none
the wiser and often getting trampled.
In August 2008, CRMPG III issued a report
titled "Containing Systemic Risk: The Road to Reform."
It was deceptive on its face in stating that CRMPG "was designed
to focus its primary attention on the steps that must be taken
by the private sector to reduce the frequency and/or severity
of future financial shocks while recognizing that such future
shocks are inevitable, in part because it is literally impossible
to anticipate the specific timing and triggers of such events."
In fact, the "private sector"
creates "financial shocks" to open markets, remove competition,
and consolidate for greater power by buying damaged assets cheap.
Financial history has numerous examples of preying on the weak,
crushing competition, socializing risks, privatizing profits,
redistributing wealth upward to a financial oligarchy, creating
"tollbooth economies" in debt bondage according to Michael
Hudson, and overall getting a "free lunch" at the public's
CRMPG explains financial excesses and
crises this way:
"At the end of the day, (their) root
cause....on both the upside and the downside of the cycle is collective
human behavior: unbridled optimism on the upside and fear on the
downside, all in a setting in which it is literally impossible
to anticipate when optimism gives rise to fear or fear gives rise
"What is needed, therefore, is a
form of private initiative that will complement official oversight
in encouraging industry-wide practices that will help mitigate
systemic risk. The recommendations of the Report have been framed
with that objective in mind."
In other words, let foxes guard the henhouse
to keep inventing new ways to extract gains (a "free lunch")
in increasingly larger amounts - "in the interest of helping
to contain systemic risk factors and promote greater stability."
Or as Orwell might have said: instability
is stability, creating systemic risk is containing it, sloping
playing fields are level ones, extracting the greatest profit
is sharing it, and what benefits the few helps everyone.
Michel Chossudovsky explains that: "triggering
market collapse(s) can be a very profitable undertaking. (Evidence
suggests) that the Security and Exchange Commission (SEC) regulators
have created an environment which supports speculative transactions
(through) futures, options, index funds, derivative securities
(and short-selling), etc. (that) make money when the stock market
crumbles....foreknowledge and inside information (create golden
profit opportunities for) powerful speculators" able to move
markets up or down with the public none the wiser.
As a result, concentrated wealth and "financial
power resulting from market manipulation is unprecedented"
with small investors' savings, IRAs, pensions, 401ks, and futures
being decimated from it.
Deconstructing So-Called "Green Shoots"
Daily the corporate media trumpet them
to lull the unwary into believing the global economic crisis is
ebbing and recovery is on the way. Not according to longtime market
analyst Bob Chapman who calls green shoots "Poison Ivy"
and economist Nouriel Roubini saying they're "yellow weeds"
at a time there's lots more pain ahead.
For many months and in a recent commentary
he refers to "the worst financial crisis, economic crisis
and recession since the Great Depression....the consensus is now
becoming optimistic again and says that we are going to go from
minus 6 percent growth to positive growth in the second half of
the year....my views are much more bearish....The problems of
the financial system are severe. Many banks are still insolvent."
We're "piling public debt on top
of private debt to socialize the losses; and at some point the
back of (the) government('s) balance sheet is going to break,
and if that happens, it's going to be a disaster." Short
of that, he, Chapman, and others see the risks going forward as
daunting. As for the recent stock market rise, they both call
it a "sucker's rally" that will reverse as the US economy
keeps contracting and the financial system suffers unexpected
or manipulated shocks.
Highly respected market analyst Louise
Yamada agrees. As Randall Forsyth reported in the May 25 issue
of Barron's Up and Down Wall Street column:
"It is almost uncanny the degree
to which 2002-08 has tracked 1932-38, 'Yamada writes in her latest
note to clients.' " Her "Alternate Hypothesis"
compares this structural bear market to 1929-42:
-- "the dot-com collapse parallels
the Great Crash and its aftermath," followed by the 2003-07
recovery, similar to 1933-37;
-- then the late 2008 - early March 2009
collapse tracks a similar 1937-38 trajectory, after which a strong
rally followed much like today;
-- then in November 1938, the market dropped
22% followed by a 26% rise and a series of further ups and downs
- down 28%, up 23%, down 16%, up 13%, and a final 29% decline
ending in 1942;
-- from the 1938 high ("analogous
to where we are now," she says), stock prices fell 41% to
a final bottom.
Are we at one today as market touts claim?
No according to Yamada - top-ranked among her peers in 2001, 2002,
2003 and 2004 when she worked at Citigroup's Smith Barney division.
Since 2005, she's headed her own independent research company.
She says structural bear markets typically
last 13 - 16 years so this one has a long way to go before "complet(ing)
the repair process." She calls the current rebound "a
bungee jump," very typical of bear markets. Numerous ones
occurred during the Great Depression, 8 alone from 1929 - 1932,
some deceptively strong.
Expect market manipulators today to produce
similar price action going forward - to enrich themselves while
trampling on the unwary, well-advised to protect their dollars
from becoming quarters or dimes.
Stephen Lendman is a Research Associate
of the Centre for Research on Globalization. He lives in Chicago
and can be reached at firstname.lastname@example.org.