Tuesday, June 15, 2010

Proxy Fight

Regular readers know I've written before about the possibility of government intervention in the stock market. I'll explain shortly why this issue just became more urgent. For now, here are some of the reasons this matters. The details of any intervention would determine the degree to which these apply, but conceptually these are the main implications:

1. It would reward the speculator class at the expense of the investor class. The former includes high-frequency traders and algorithmic, program-oriented, and momentum players. The latter prefers to buy stocks at favorable valuation levels, incrementally and over a period of time. This becomes harder when intervention prevents stocks from finding their natural levels.

2. It would constitute a backdoor bailout of Wall Street, which obviously depends in many ways on rising stock prices.

3. It would essentially make the stock market a giant money laundering mechanism for corporate insiders, with public funds used to buy stocks and keep the market inflated while insiders sell.

4. It would affect the perception of risk across the entire asset spectrum (not just stocks) and encourage the same malinvestment and misallocation of capital that contributed to the credit bubble. (As a former trader on one of Wall Street's top sell-side desks, I've seen how belief in the existence of a backstop influences the perception and tolerance of proprietary risk.)

5. It would create the potential for abuse if a Wall Street firm is involved in the scheme. This would include frontrunning the orders before they are executed or tipping off other parties to the activity. If the scheme involves a government promise to backstop the Wall Street firm against losses, insufficient controls would allow the firm to claim losses greater than what it incurred.

6. It would have various political implications, including the ability to boost the stock market before an election, after an important presidential speech, or during or after high-profile testimony by Federal Reserve or other economic officials.

During the debate over Ben Bernanke's reappointment, I posted this list of questions for him. Sen. Jim Bunning then submitted those questions in writing to Bernanke. One of the questions was the following:

Before the financial crisis there was a widespread sense, especially on Wall Street trading desks, that the stock market was strangely resilient. This encouraged excessive risk-taking in various types of assets. Do you have direct or indirect knowledge of the Federal Reserve or any government entity or proxy ever intervening to support the stock market (or any individual stock) via futures or in any other way? If yes, who decides the timing of such intervention and with what criteria? How is it funded? Which Wall Street firm handles the orders, and who sees them before they are executed?

Bernanke's written response (page 25 here):

The Federal Reserve has not intervened to provide support to the stock market or individual stocks by trading in futures or any other financial instrument. I have no knowledge of any other U.S. government entity providing such support.

I then wrote that Bernanke's response was incomplete because he ignored the word "proxy," an important part of the question. After I posted about Bernanke's dodge, I was contacted by Rep. Alan Grayson's office for input on this issue and a possible follow-up question. In February, Grayson submitted various written questions to Bernanke (the full set along with responses is here). This question was first on the list (my bolds):

The Federal Reserve has taken extraordinary measures to prevent losses by large financial institutions. This has led to widespread speculation that such measures might include intervention in the stock market. Has the Federal Reserve--alone or in concert with the Treasury Department or any part of the government--ever taken any action with the purpose or effect of supporting the stock market or an individual stock? The means to do so included in this inquiry include, but are not limited to, the futures market, the Exchange Stabilization Fund, foreign custody accounts, the System Open Market Account, and any other account, mechanism or financial instrument. Has the Federal Reserve, Treasury, or any part of the government ever directed, acted in conjunction with or otherwise engaged a proxy or intermediary--including but not limited to a private sector entity or foreign central bank--with such a purpose or effect? Please respond to both parts of this question. Please note that we are asking you to enumerate each such action, with a description on each occasion of who, what, when, where and why.

This question was designed to prevent another Bernanke dodge. It specifically and explicitly asked him to respond to the proxy/intermediary issue. Here is his complete written response, which Grayson has now received after three months:

The Federal Reserve has not intervened to support the stock market or an individual stock.

That's it.

Whatever one might say about Ben Bernanke -- and regular readers know I've said a lot in the past -- inattention to detail is not part of his personality. Whether written or spoken, his answers to questions are clear, strikingly thorough, and often expansive (indeed, see his responses to the rest of Grayson's questions here, and note his diligence in addressing each part -- every sentence and every word -- of the other questions). A momentary lapse on one question (Bunning's) is possible. For Bernanke, twice is inconceivable, especially in the context of the question's specific request to "respond to both parts."

Recommendations:

1. Congress has oversight of the Fed. The Fed's chairman is refusing to respond fully to a question from Congress. Congress needs to find out why. That means submitting the question again in writing, noting that the previous response was incomplete and suggesting that it should not take another three months to answer a single question (and if it does, that would say something deeper about this issue). There is no need to change the question's language; it is already as specific and comprehensive as possible. If the opportunity arises to ask Bernanke the question in testimony, it should be taken, but getting an answer in writing is important for this type of question. Fed General Counsel Scott Alvarez should also be asked this question in writing.

2. Tim Geithner should be asked the same question for several reasons. In his response to Bunning in December, Bernanke said that he had "no knowledge of any other U.S. government entity providing such support." In his recent response to Grayson, Bernanke limited his answer to the Fed. In the months between those two responses, did Bernanke learn of some sort of activity at Treasury? Or did he regret his previous answer? Was he advised, perhaps by a Fed attorney, to limit the scope of his response to Grayson?

Another reason to query Geithner is explained by the New York Post's John Crudele, who wrote this column in which he referenced my original question for Bernanke verbatim (Crudele has been all over this issue for many years). Briefly, if Treasury is running market intervention, it could do independently of the Fed (almost). Treasury's possible role in an intervention scheme has been the subject of speculation for years, partly because of Alan Greenspan's comments in two 1995 FOMC meetings. From the January 31 transcript: "I am really sensitive to the political system in this society. The dangers politically at this stage and for the foreseeable future are not to the Federal Reserve but to the Treasury. The Treasury, for political reasons, is caught up in a lot of different things." From the March 28 transcript: "We have to be careful as to precisely how we get ourselves intertwined with the Treasury; that is a very crucial issue. In recent years I think we have widened the gap or increased the wedge between us and the Treasury, as Ted was mentioning. In other words, we have gone to a market relationship and basically to an arms-length approach where feasible in an effort to make certain that we don't inadvertently get caught up in some of the Treasury initiatives that they want us to get involved in. Most of the time we say "no." In both cases, Greenspan's comments were in the context of Treasury's use of the Exchange Stabilization Fund for Mexico.

Moreover, in 1998 Ron Paul submitted a written question to Treasury that was similar to Grayson's, in which he specifically asked about the proxy issue and use of the ESF to intervene in the stock market. Treasury took a full year to reply, and even then its response was incomplete.

3. As a practical matter, since Treasury lacks the trading infrastructure to conduct intervention, it would probably have to use the Fed's New York desk. This would likely be the operational nexus for any intervention, whether Treasury or Fed-directed. Officials there need to be asked the same question that Bernanke dodged. That should certainly include William Dudley, as well as Brian Sack and related employees. While Bernanke and Geithner are clearly "all in" and willing to say anything at this point, less-senior cogs in a scheme may not be willing to risk legal consequences by providing false answers, especially to conceal something in which they might be unwitting or reluctant participants.

This issue has always been seen as the province of conspiracists and bitter short-sellers. It was also long understood in Washington that there were certain questions one didn't ask in public, and this was one of them. Because of the Fed's conduct during the past few years, that taboo is gone. With the assumption of intervention now widespread on Wall Street and in the hedge fund community, and risk perceptions influenced accordingly, this issue is important. Bernanke's selective and uncharacteristic brusqueness makes it even more so.

14 Comments:

Anonymous Ghidorah said...

I'd be surprised if they weren't doing it. If there is one thing I have learned over the past decade it is that the Elite are runing this country for their own narrow benefit and telling the public whatever they have to to keep them quiet. It helps that people still seem to believe that Truth, Justice and the American Way still all belong in the same sentence.

More people are starting to get it though. There is still enough obfuscation that they don't know exactly what's going on. But they know that they are being lied to and treated unjustly.

6/15/2010 12:50 PM  
Anonymous Goldhorder said...

Look at what they did right in front of our eyes! Inspite of public opinion. Gold and silver people... Gold and silver

6/15/2010 3:43 PM  
Blogger oyster said...

I've always wondered about the movements the day before the Pres. election in 2004. The Dow had been descending inexorably throughout the summer and fall of that year, and the day before the election it had an extremely brief intraday dip below the "psychologically important" 10,000 level. Then it shot up and rallied back well above 10k. Bush was elected narrowly, by virtue of votes in Ohio. Perhaps this was just a jump due to programmed computer trades, but I know more than one person at the WH was sweating election day headlines of the Dow closing below 10k. Whether or not the market got government support in 2004, that was certainly the type of situation where I'd expect such intervention to occur, if it were to occur for political purposes.

6/16/2010 11:47 AM  
Anonymous KAIMU said...

ALOHA!!

I like this CR post because it points to a very important issue that has literally taken over global economies and global markets as well as the global societal fabric. Intervention never succeeds in the long run as it destroys confidence and trust not only in the markets being intervened but in the governing apparatus that supports such interventions, which translates ultimately into the global monetary system.

Many more instances of intervention exits within the FOMC Meeting Minutes. There is a long history even before the Reagan era and the 1987 crash.

But just how deep is the intervention and is it just in the stock and futures markets? I see a much larger network of intervention than just the markets as "intervention" extends into society in many diverse channels, most of which would be "education". Are we Americans taught that government is superior to the freedom of individualism? Food for thought.

Definitely the government economic data that I see does not in any way reflect what I see in my life. I for one have never seen so many friends and relatives suffer chronic joblessness and chronic indebtedness in all my life. This is not what baby boomers were promised in our 20s. All I can say to the youth of America now is VOTER BEWARE!

The first edition of the Ludwig Von Mises book HUMAN ACTION was published in 1949, over 60 years ago. Here is a quote from that book that rings very true today.

The development of a profession of economists is an offshoot of interventionism. The professional economist is the specialist who is instrumental in designing various measures of government interference with business. He is an expert in the field of economic legislation, which today invariably aims at hindering the operation of the market economy.

Interventionism cannot be considered as an economic system destined to stay. It is a method for the transformation of capitalism into socialism by a series of successive steps.

Certainly the above Mises quote speaks to his excellent book PLANNED CHAOS. Intervention is but a tool for a monopoly. Whenever the few control the many there will eventually exist a monopoly and we now have two such monopolies in control of America. One at the US FED controlling the money and the other is the two party political monopoly controlling the votes, pretending there is a "real" choice.

When will "failure" be allowed to happen for the elitist agendas in politics, banking and commerce. How much PUBLIC DEBT must Americans assume to preserve ineptitude on all fronts. This goes against anything remotely Darwinian and it wreaks of immorality.

6/17/2010 1:21 PM  
Anonymous Goldhorder said...

As a side note... I actually paid attention to who attended the bilderberg conference this year. I was curious to see if the elites from China, India, Brazil, and Russia attended these things. I see they don't. That says to me that this whole "global economy" thing is much more fragile than people realize. This one world government nonsense is not going to happen. It does look like Turkey was represented. It makes me wonder what our elites are thinking. Can they really afford to throw Turkey overboard because they offended our favorite little apartheid state? Turkey is not a country to be messing around with.... Especially considering their PM just became a hero to the muslim world and our wars grind on and on. Can we really be so dumb? How long has Turkey been our ally? Were we not pointing to our friends the turk as an example of how we weren't at war with Islam? Are we going to wage a global war on Islam? The CIA, the Fed, and the military industry are on the verge of defeat. They make the wrong decision here and our goose is cooked. We are screwed anyways... But this would just show they don't have any desire to ever put America on a peaceful path again.

6/17/2010 3:19 PM  
Anonymous Goldhorder said...

http://spectator.org/archives/2010/06/14/who-lost-turkey-not-europe

wow... Gates is just delusional. Our Washington elite live in some kind of imaginary bubble world. They have no clue what is going on in the world. These people think they have more control and power than they do. Amazing

6/17/2010 3:53 PM  
Anonymous Goldhorder said...

http://www.lewrockwell.com/orig11/blumenfeld1.1.1.html
btw... Kaimu reminded me John Taylor Gatto has a new book out. Here is a review. This is why there is no hope. The American Public have been trained well...

6/17/2010 8:08 PM  
Anonymous KAIMU said...

ALOHA!!

We have been trained since our early youth to believe that government is the best solution and the ultimate "safety net". This explains why failure in government is rewarded with more government and in particular more government spending to cure our economic ills. This begets yet more failure.

Like a school of fish in the ocean we believe in the old saying "safety in numbers". However, when "blank checks" in the form of debt are embedded into our daily life from Main Street to Wall Street to Pennsylvania Avenue then as numbers increase the safety value diminishes. Give each fish a credit card and see.

This brings me to the flip side of "blank checks". What the IRS terms "bad debt". Is there good debt? The IMF penalty for too much "bad debt" is in one word, which is greatly bantered about in the media these days ... AUSTERITY. What exactly is AUSTERITY suppose to look like? Instead of a $300BIL deficit it will be $240BIL? Instead of 210,000 government union workers only 190,000? Instead of $13TRIL in US PUBLIC DEBT only $12.8TRIL? Instead of 10% Unemployment 20%? At this point in the debt saturation cycle what is AUSTERITY? Whatever we Americans think it is the Greeks think AUSTERITY is something worthy of rioting in the streets, something bad and evil. What is AUSTERITY to Americans though? Maybe its only one microwave in the house? Only one Apple IPhone every three years instead of every year? Only 20inch flat screens instead of 50 inch? Or is it only two meals per day instead of three? Then when you consider the basics like food and the cost to feed America then who tells the 40.5 million Americans on SNAP(Food Stamps) that they are on their own? 1 in 7(7.4) Americans cannot afford to feed themselves right now. That is more people than Australia, Sweden and Switzerland combined. Imagine getting off the plane in Sydney and Stockholm and Zurich and everyone you see is begging for food, asking you for money to buy food. Imagine that for a second ... In 1970 only 3% of the US population were on food stamps, now its 13%. Has more government and debt solved poverty and hunger in America? Because as the size of the US government has grown so has poverty and hunger. Now imagine in America what things would look like if no more Unemployment checks were issued. Then go one step more and imagine what would happen if no more Social Security checks were mailed to our Senior citizens. Is that what AUSTERITY will look like?

Prior to FDR there was no government "safety net". No Unemployment, no Social Security, no Medicare, no SNAP(food stamps), no Section 8, no SSI, no TARP, no farm subsidies, no welfare as we know it now. How did Americans and American business survive then? To find that answer you have to imagine what America would look like with very little government "intervention" and almost no public debt combined with practically zero taxes. That translates to almost no government when compared to the size of government today. Then you have to imagine having a family farm and asking your family for help instead of filling out forms at the Unemployment office. In those days Americans relied on Americans and not government welfare and foreigners buying US Treasuries. We had American factories that made "all" products for Americans. We exported oil. In those days you couldn't sell a CDS to save your life! That was back before Goldman Sachs existed. What product does Goldman Sachs manufacture that I can use in my daily life? Can I eat CDS or MBS? I cannot eat sauteed grilled "fraud" no matter how much mango chutney they put on it, yet somehow my government has decreed that my kids and I have to pay for it even though it was never on the menu. Who owns who in America? Or should I say ... "Who owes who?" These days you would think that we fought in WW1 and WW2 and Vietnam so that Goldman Sachs could thrive ...

6/18/2010 5:26 AM  
Anonymous Goldhorder said...

The two greatest crimes in America have been the federal centralization of public schooling to end americans distrust of government and the creation of the federal reserve banking system to work towards leaving the gold standard in 1971. I wish Volcker hadn't saved the elites from themselves... If he hadn't Americans would have had to face reality before these clowns really destroyed the country. How long has the Fed had near zero interest rates for the "important" banks. What power and influence that goives them. They can buy shares in any company, make offers on any private company, buy any real estate they want at virtually zero percent interest.... Oh my how hard our "best and brightest" must work to turn a profit.

6/18/2010 6:17 PM  
Anonymous Anonymous said...

How about asking only the second part as follows: "We understand that the Federal Reserve has not itself intervened in the stock market. Has the Federal Reserve ever engaged a proxy or any other intermediary, to provide support to the stock market or individual stocks by trading in futures or any other financial instrument?"

6/21/2010 3:39 PM  
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