GATA was born in the late 1990’s - primarily
on the back of fundamental research by Frank Veneroso
regarding Central Bank Gold Leasing. Veneroso’s
intellectual curiosity was aroused after being fed detailed data re: gold
leasing by the Bank of England’s Terry
The fact that gold prices and interest rates were so
highly “inter-related” was first publicized in the alternative
media by Reg Howe in 2001. Howe alerted the world
to academic accounts of the special relationship between gold and interest
rates. He highlighted the body of economic law and observation associated
Paradox” – something Lawrence Summers
[later, U.S. Treasury Secretary and current senior economic advisor to Obama]
wrote about with Robert Barsky while he was a
professor at Harvard in the 1980’s.
The upshot of this Gibson’s Paradox economic
theory goes something like this: real interest rates and the gold price are
causal and inter-related with each other.
This is why Professor Lawrence Summers was summoned
to Washington as assistant Secretary of Treasury under Robert Rubin [Clinton
Admin. / 1993]. It was to implement HIS THEORETICAL WORK under the auspices of Treasury
Secretary Robert Rubin’s mythical “Strong Dollar Policy”.
since 1994, the mythical Strong Dollar Policy had necessitated a two prong
strategy: that of keeping rates low because weak currencies are typified by
high interest rates; and the price of gold must be suppressed as it stands as
an historical alternative settlement currency – and they don’t
want the alternative to appear “strong”.
The interrelatedness of the gold price and interest
rates helps to explain why – According to the Office
of the Comptroller of the Currency - of the 302 Trillion in aggregate
derivatives held by American Bank Holding Cos – 81 % of this is
composed of interest rate products. This is due to the symbiosis that exists
between gold and interest rates.
Libor – or the London Inter-Bank Offered Rate
- is one of the lynch pins in setting [rigging] global U.S. Dollar interest
rates. This is why a larger discussion needs to be had about the Libor
rigging – it is not a London or Barclay’s centric story. It has EVERYTHING
to do with making the American Dollar look viable as the world’s
When The Libor
Story First Broke
It was Q3 2007 – post [Mar. 2007] Bear Stearns
collapse – when credit markets “seized up” in response to
the [Aug. 2007] sub-prime crisis, where triple-A-rated mortgaged bonded
failed – stories first began circulating the mainstream financial press
that “Libor” was “broken”.
The “tell-tale” that things were not
right was A] the widening of the TED Spread [3 month Eurodollar future vs. 3
month U.S. T-Bill] – expressed in basis points, and B] the growing
spread between Libor and the Eurodollar future – again, expressed in
Historically, a widening
TED Spread has been referred to in credit terms as a “flight to
quality”. It demonstrates how investors are more willing to buy
sovereign 3 month government T-bills at ever decreasing yield relative to
higher yielding products that do not carry sovereign guarantees. It is
reasoned in cases like this that return of capital becomes more important to
investors than return on capital.
But there are some
problems with this conventional thinking.
With the U.S. Dollar Index
collapsing, taking out major support levels and the dollar being abandoned
– there was no “flight to quality”.
So what was really
We get our clue from the
widening disparity [in basis points] between the 3 month Eurodollar Futures
contract and 3 month Libor. These two measures are proxies for one another
and typically they trade virtually tic-for-tic with each other in terms of
yield. Notice how the spread widened at the beginning of Q3/07 and then
contracted at the conclusion of Q4/07:
The aberration first manifested itself as a Q3/07
trading phenomena. We get a clue as to what the underlying is when we examine
the composition of J.P. Morgan’s derivatives book from a control period
– Q2/07 – through to Q4/07:
Here we see the less than
1 year Swap component of Morgan’s book grow from 25.2 Trillion in Q2/07
to 32.8 Trillion in Q3/07 before reverting back to 24.7 Trillion in Q4/07.
The 7.5 Trillion “bloat” in Morgan’s book – coupled
with the plunge in rates and failing U.S. Dollar Index - in Q3/07 tells us
the J.P. Morgan was a MASSIVE PLAYER in the very “short end” of
the curve [centered on 3 month credit space]. We can discern that Morgan was
an ENORMOUS purchaser of 3 month U.S. T-bills [likely as hedges for trades being
conducted with the ESF brokered through the N.Y. Fed trading desk] –
this is what caused the “blow-out” in the TED Spread as well as
the Eurodollar Future/Libor spread and put the brakes on a major break down
of the U.S. Dollar Index. Their book “re-coiled” 3 months later
when these positions matured.
At the onset, commercial
Banks – fearing a financial market meltdown – immediately became
extremely risk averse and actually started to raise rates:
But the “Free
Markets” were overwhelmed by J.P. Morgan’s rate rigging / defense
of the dollar.
Ladies and gentlemen, 7.5
Trillion dollar interventions into the 3 month credit markets are not and
never will be the work of Commercial Banks or Bank Holding Companies.
Interventions of this kind are EXCLUSIVELY the work of National Treasuries /
The late 2007 dichotomy
between Libor [Eurodollar Futures] and 3 month U.S. T-bills was brought on
– not because Libor was “broken” – but by the U.S.
Treasury’s Exchange Stabilization Fund [ESF] pursuing/inflicting
Imperialist U.S. monetary policy – brokered through the N.Y. Federal
Reserve - on the world through the trading desk of J.P. Morgan Chase.
Moving Forward to the Barclays Libor Rigging Scandal
Much of the recent guffaw about Libor fixing
has centered on London based, Barclays Bank Plc. The gist of the allegations
against Barclays being – in the aftermath of Lehman Bros. collapse in
the fall of 2008 – Barclays consistently posted higher Libor rates than
competing banks who are also polled daily by the British Bankers Association
[BBA] for their Libor rates. It has been said by some, like Zerohedge, that Barclays was attempting to influence
[rig] rates higher than they otherwise should have been:
Perhaps it is true that Barclays began
setting their “Libor” rates higher in the aftermath of
Lehman’s collapse – but that’s not the whole story –
not by a long shot.
If you look closely at the Zerohedge chart above – you will notice that Barclays
actually began posting higher Libor rates “BEFORE” the collapse
Barclays was the last bank to see the books of Lehman as they were at one
point – in the late stages of the 2008 financial crisis - figured to be
a likely acquirer of Lehman. When Barclays saw the state of Lehman’s
books – they acted intuitively CORRECT – one might argue –
and began raising rates, not wanting to lend, to preserve their capital.
Additionally, in the wake of the failed
Barclays/Lehman arranged marriage – there was a “small
issue” with a $138
Billion Post-Bankruptcy JP Morgan Advance to Lehman; At Least $87 B Repaid by
Brothers Holdings Inc., the securities firm that filed the biggest bankruptcy
in history yesterday, was advanced $138 billion this week by JPMorgan Chase
& Co. to settle Lehman trades and keep financial markets stable,
according to a court filing.
One advance of $87 billion was made on Sept. 15
after the pre-dawn filing, and another of $51 billion was made the following
day, according to a bankruptcy court documents posted today. Both were made
to settle securities transactions with customers of Lehman and its clearance
parties, the filings said.
The advances were necessary “to avoid a
disruption of the financial markets,” Lehman said in the filing.
The first advance was
repaid by the Federal Reserve Bank of New York, Lehman said.
The bank didn’t say if the second amount was repaid. Both advances were
“guaranteed by Lehman” through collateral of the firm’s
holding company, the filing said. The advances were made at the request of
Lehman and the Federal Reserve, according to the filing.
Lehman disclosed the
advances in a motion seeking court permission to give JPMorgan’s claims
special status in its attempts to recover any advances. Lehman said that if
that status isn’t granted, JPMorgan may not be able to make future
advances needed to clear and settle trades.
“The granting of the
relief requested is in the best interests of the estate and its stakeholders
and the public markets,” Lehman said, adding the advances would be
“essential to Lehman’s customers.”
JPMorgan may make future
advances at its sole discretion, all of which would be guaranteed by Lehman
under its agreement to pledge collateral, Lehman said.
JPMorgan said in a
statement in court documents that it has had a clearing agreement with Lehman
since June 2000, and had pledged its collateral under an Aug. 26 guarantee.”
While no in-depth reason has ever been
offered to explain the “advance” outlined above, a degree in
rocket science is not needed to figure out what trades were being done to
“keep markets stable [err, rigged]”. From the looks of J.P.
Morgan’s derivatives book over the 2 quarters Q4/08 through Q1/09 we
see ANOTHER 8 TRILLION dipsy-doodle in the less
than 1 year swap constituent of J.P. Morgan’s derivatives book –
this time in Q1/09, post Lehman collapse – where the inflated J.P.
Morgan short term swap positions have since remained elevated. It should be
noted that the less than 1 yr. swaps component of J.P. Morgue grew from 23.9
Trillion to 32.0 Trillion [Q4/08-Q1/09] while their overall book contracted
from 87.4 Trillion to 81.2 Trillion in the same time period:
source: Office of the Comptroller of the Currency
source: Office of the Comptroller of the Currency
So, while Lehman was in the death-throws of
collapsing – after Barclays couldn’t be induced to touch them
with a “barge pole” - J.P. Morgan “advanced” 138
billion [collateral perhaps?] to Lehman so they could “perform/settle
trades” –– mostly, if not all reimbursed/paid for by the
Fed. While this “stabilizing trade” was being instituted –
short term rates simultaneously careened down to zero from 200 basis points
[2 %]. Then, in the immediate aftermath of the collapse – J.P.
Morgan’s less than 1 yr. component of their swap book grows by 8
Trillion in one quarter while their overall book was contracting by more than
6 Trillion in notional???
I hope I haven’t lost anyone here
because these facts are MUCH STRANGER AND HARDER TO BELIEVE THAN FICTION.
What appears to have happened here: J.P.
Morgan did not want to be identifiable as the originator of 8 Trillion worth
of less than 1 yr. Swap instruments – so they pre-funded Lehman to
strap these positions on - positions they KNEW IN ADVANCE they would inherit
once Lehman’s collapse was official. This way – no more unwanted
attention would be drawn to J.P. Morgan [the Fed / U.S. Treasury in drag].
clearly knew how bad the whole situation was – being the last ones to
see the horror that was Lehman’s books - and were likely the only counterparty
in the proceedings who acted in an informed, financially responsible manner.