Sunday, May 9, 2010

Department of Justice and Commodities Futures Trade Commission go After JPMorgan for Alleged Silver Price Manipulation

Three weeks ago it was Goldman Sachs that was in the government hot seat, when they were charged with deceiving clients by selling them mortgage securities secretly designed to fail by a hedge-fund firm run by John Paulson, who in turn made a killing betting against the same securities packages he was selling as the housing market collapsed. It would seem, as of this morning, however, that Goldman now gets to share the throne (and not the one these so-called masters of the universe are used to sharing) with non other than JPMorgan.

The New York Post's Michael Gray, who is--as far as I know--the first to report on this issue, broke the story this morning:
"Federal agents have launched parallel criminal and civil probes of JPMorgan Chase and its trading activity in the precious metals market.... The probes are centering on whether or not JPMorgan, a top derivatives holder in precious metals, acted improperly to depress the price of silver, sources said. The Commodities Futures Trade Commission is looking into civil charges, and the Department of Justice's Antitrust Division is handling the criminal probe, according to sources, who did not wish to be identified due to the sensitive nature of the information.
Apparently these probes are far-ranging and far-reaching, with federal officials investigating a number of traders at JPMorgan and looking into JPMorgan's precious metals activities on both the London Bullion Market Association's (LBMA) exchange, as well as the New York Mercantile Exchange (Nymex), which focuses on future paper derivative trades.

As Gray explains the details of the allegations
, "JPMorgan increased its silver derivative holdings by $6.76 billion, or about 220 million ounces, during the last three months of 2009, according to the Office of Comptroller of the Currency." This information is rather suspicious in light of earlier allegations related to JPMorgan's involvement in suppressing the price of silver by "shorting" the precious metal in tandem with the release of news announcements that were extremely positive and therefore should have, by all accounts, sent the price of silver upwards.

Gray goes on to explain:
Last week, The Post got a telling e-mail the Justice Dept. sent to a concerned investor. "Thank you for your e-mail regarding allegations that JPMorgan Chase, and perhaps other traders, are manipulating the silver futures market," the e-mail read.
Of course, what makes the email most telling is that supposedly the concerned investor's e-mail to the Justice's Anti-trust division never actually mentioned any companies or traders in particular.

Much of the details pertaining to the case is still a little unclear as it is only now leaking out to the masses. On a personal note, however, one thing I am a bit concerned about is the leverage that these coincidental allegations against the big banks gives the government. Now do not get me wrong, I am not in any way defending the HB&B's, but the expression "better to deal with the devil you know than the one you don't" comes to mind. I do not think any government, US or other, truly understands on the whole how intractable many of their well-intended reforms are. Even those individual members of congress who truly believe that they are "doing good for the people" are seldom aware of the ramifications of their meddling with market forces. For example (and I expect to write more on this matter later in the week) Basel 3 is expected to be adopted later this year and one certain mandate that will come with adoption of the doctrine will be an increase in the obligatory margin of capital banks and brokers will be expected to have on hand at all times. On the surface, this measure will be a positive and necessary move that should (and in the long-term probably will) make the marketplace and the larger economy safer and more resilient. However, behind the scenes what it amounts to is forceful capital raising on the part of banks across the board. Where will that money come from? Some of it can potentially come from organic growth, but not all of it, especially since organic growth in the markets takes time and they will not likely be granted a whole lot of time to reach their new margin levels. The remainder will have to come from public and and private borrowings and asset sales. Either way, all three of these sources will put downward pressure on the stock market and the greater economy as money funnels into the bank's coffers and I'm not sure the short-term consequences of such an agreement are accounted for. Then again, that's probably why there is a "3" after Basel to begin with.

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