The modus operandi (MO) of deviant behavior aids
investigators in doing criminal profiling. Forensic accounting takes a
similar approach and leads us to some unnerving conclusions about Uncle Sam.
As Tax Payers we place our sacred trust in our elected officials and
government. Is that trust being handled similarly to how Goldman Sachs
apparently has been handling its fiduciary responsibilities?
Has our government been playing accounting games
like European tax payers discovered in Greece
and like many angry tax payers are now discovering in local, city, state and
sovereign governments across Europe and
the US? All are now learning how
the use of off balance sheet accounting and cleverly structured Interest
Rates Swaps have been applied to obscure visibility to toxic debt levels from
the very tax payers who will be responsible for the debt obligations.
Is our government playing the role of Jack Nicholson
in “A Few Good Men” when he condescendingly justified his
behavior, yelling in the courtroom: “You can’t handle the
truth!”
If you can handle the truth then let me explain some
very suspicious behavior of our trusted Uncle Sam.
WHALES MAKE WAVES
In two recent articles in the Extend & Pretend
Series, I laid out eight suspicious
anomalies that few professionals can presently explain.
1- SUSPICIOUS CLUE #1 - PLUMMETING
US MONEY SUPPLY DESPITE QE (Quantitative Easing)
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2- SUSPICIOUS CLUE #2 – US
TREASURY AUCTION – Historic Direct versus Indirect Bids
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3- SUSPICIOUS CLUE #3 - MAJOR
PARTICIPANTS REDUCING US
TREASURY HOLDINGS
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4- SUSPICIOUS CLUE #4 – DRAMATIC
COMMERCIAL BANK LENDING SPIKE
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5- SUSPICIOUS CLUE #5 – HISTORIC
10 YEAR INTEREST RATE SWAP REVERSAL
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6- SUSPICIOUS CLUE #6 – HISTORIC
& UNPRECEDENTED TRANSFER OF FUNDS
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7- SUSPICIOUS CLUE #7 – GOLD
MARKET MANIPULATION CONFIRMED IN CFTC HEARINGS
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8- SUSPICIOUS CLUE #8 – PROPRIETARY
RECEIPTS FROM THE PUBLIC
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9- SUSPICIOUS CLUE #9 – US TREAS.
PURCHASES SUDDENLY COMING FROM CARIBBEAN & UK (Ch Islands)
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Though there are more suspicious anomalies than the
above list reflects, I want to add a ninth before we proceed with attempting
to make sense of them.
SUSPICIOUS CLUE #9 – US
TREASURY PURCHASES ARE SUDDENLY COMING FROM THE CARRIBEAN & UK (Channel
Islands)
The “tooth fairy” which I described as
part of Suspicious Clue #2 in Extend
& Pretend – Gaming the US Tax Payer appears to reside in the Caribbean
and UK Channel Islands. The ‘tooth fairy’ was the name I gave to
the mysterious direct bidder that has emerged in the US Treasury Auction to
stop the bond auction from being a failure. A failure would scare the market
and would result in a sudden and dramatic increase in US Treasury interest
rates.
The ‘Tooth
Fairy’ Residence
THE BALANCING ACT
To understand the shorter term actions we are seeing
in our table of suspicious clues above, it is important to place them in the
following context:
1- Uncle Sam as represented by the US Treasury, with
a $14 TRILLION debt load, must do everything in its power to keep Interest
rates as low as possible for as long as possible.
2- Placing too much supply on the US Treasury
Auction which doesn’t match buying demand will drive interest rates up
and possibly spook the market. This would elevate rates to even higher
levels. Indirect Bids are already steadily falling.
3- The US
Treasury must balance monthly revenue receipts with monthly outlays to ensure
sufficient funds are available. This means the rate of change in tax receipts
is critically important. Tax receipts are already below reduced budget
estimates. ‘Over the first six months of the fiscal year, personal
income tax receipts net of refunds are actually down significantly –
8.4%. Reflecting last year’s sharp drop in personal income, final tax
settlements on 2009 returns are running about 11% below year-earlier levels,
and refunds (as reported in the Daily Treasury Statement) have been up about
5%.’ (2)
4- Historically sovereign countries faced currency
crisis and debt funding problems when fiscal deficits rose above 5%. The
IMF’s harsh restrictions were imposed when these levels were
approached. The EMU Maastricht Treaty rules restricted debt to 3% of
GDP. The 2010 US
Government Budget estimates presently reflect a 10.7% deficit.
5- When unemployment rises on top of heavy fiscal
deficits, serious problems become even more critical. Tax revenues plummet
when unemployment is high and consumer purchases fall. US
unemployment as reflected by U3 is presently reported at 9.8%. The broader U6
measure reflects approximately 17%. According to Government Shadow Statistics the actual unemployment is closer to 22%. This is
why the public is so skeptical with what the government tells them. It
doesn’t match what they see in their neighborhood and hear from friends
and family.
6- The actual size of total sovereign debt is also
important versus the annual fiscal deficit financing needs. It isn’t
just the percentage of budget that interest payments are consuming (US
interest payments are presently net 14% of budget) but also the supply of the
rollover of existing debt financing requirements. Once again the US
faces major difficulties in this matter because the US Treasury has been steadily
reducing maturity duration over the last few years.
7- The US
is facing the strong possibility of a future credit downgrade. This would
also raise funding costs significantly which are not planned for in the
already massive deficit budgets. “The Aaa rating of the U.S.
is not guaranteed" - Moody's!
With all these interconnected elements playing out
simultaneously, it is an incredibly difficult job to orchestrate them in a controlled
and managed fashion. It is not credible to believe everything could be
working this well by simply matching monthly receipts with outlays and
issuing bonds at the monthly treasury auctions to make up the difference. For
anyone that has actually managed cash flows you know you require more tools
than these. The public is being very naïve to the complexities involved.
This is why cash flow management receives so little scrutiny. Those few doing
any analysis have no exposure to the management realities.
PRIMA FACIA - WHERE IS UNCLE SAM?
I have written extensively about the unregulated, non-exchange traded,
offshore, off balance sheet (OTC) $605 Trillion derivatives market and
specifically about the $437 Trillion Interest rate swap market. In Sultans
of Swap: the Getaway I laid out some
of the court actions taking place throughout Europe and the US
at all levels of government. Below is a summary of those findings along with
governments where the use of Interest rate Swaps is publicly documented.
This list includes only those Interest Rate Swap
deals that have become problematic or which I have written about. The Service
Employees Union (SEIU) has additionally documented an extensive list that was
published by the Wall Street Journal: This study by the
Service Employees International Union, was commissioned to demonstrate
the broad based seriousness of the problem.
The question is: Where is Uncle Sam?
Surely the largest debtor in the world, with the
biggest financing challenges in the world, where the whole structured finance
industry was born, where the banking industry has near monopolistic control
over congressional legislation through its $1 Million/day army of lobbyists
succumbed to the ‘forbidden fruit’. Surely Uncle Sam did not take
the high road for fear of hurting the tax payer when almost every local,
city, state and sovereign country appears to have. Not to have defies common
sense, yet that is precisely what we are led to believe. Similarly we were
told by Alan Greenspan that no one could see a bubble before it burst and by
Goldman that they never saw the housing bubble collapse coming. Sorry
gentlemen, you long ago lost my confidence in believing almost anything you
tell me.
What makes it even more suspicious is there is
absolutely no mention of interest rate swaps anywhere in the hundreds of
government accounting reports I have read over the years. Surely you would
think Uncle Sam might have occasionally tried the ‘forbidden
fruit’ in at least some minor ways. No – nothing! Like a cat burglar
– clean as a whistle – a professional job.
The closest you find that Uncle Sam even knew Swaps
existed is that at almost the instant the financial crisis hit in 2008 Uncle
Sam immediately executed a massive and highly complex Currency Swap with the
EU to attempt to put liquidity into the system. Uncle Sam clearly understood
the instruments in minute detail to make this happen on such a grand scale
and so fast. Yet we are to believe the $605 Trillion Derivative market has
nothing to do with our trusted Uncle Sam. I am sorry, I am from Missouri.
Show me this is true!
MY ASSUMPTIONS
Renowned physicists Albert Einstein and Stephen
Hawking have suggested that to solve the big problems, big leaps of faith
must be made in your assumptions. They allow you to get outside of the box
and see what has been obvious all along. This is what I propose to do.
I am therefore going to work on the premise Uncle
Sam is a MASSIVE player in the Interest Rate and Currency Swap Market.
I am also going to assume that with discovery a
significant percentage of the exponential growth of the $605 Trillion
derivatives market could be traced in some manner to Uncle Sam.
Having adopted this perspective, our suspicious
clues suddenly become obvious effects of such participation.
I have intentionally not previously speculated in
any of my Sultans of Swap
series and Extend & Pretend
series articles. For the remainder
of this article I am going to lay out my personal speculation based on these
assumptions. Your e-mails have overwhelmingly requested this.
MAKING SENSE OF THE SHORT TERM SUSPICIOUS CLUES
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Shrinking Demand
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Alternative
Financing
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1-PLUMMETING
US
MONEY SUPPLY DESPITE QE (Quantitative Easing)
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X
|
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2-US TREASURY AUCTION –
Historic Direct versus Indirect Bids
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X
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X
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3-MAJOR
PARTICIPANTS REDUCING US
TREASURY HOLDINGS
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X
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4-DRAMATIC
COMMERCIAL BANK LENDING SPIKE
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X
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5-HISTORIC
10 YEAR INTEREST RATE SWAP REVERSAL
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X
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X
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6-HISTORIC
& UNPRECEDENTED TRANSFER OF FUNDS
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X
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7-GOLD
MARKET MANIPULATION CONFIRMED IN CFTC HEARINGS
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X
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8-PROPRIETARY
RECEIPTS FROM THE PUBLIC
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X
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X
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9-US
TREASURY PURCHASES ARE SUDDENLY COMING FROM THE CARRIBEAN & UK (Channel
Islands)
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X
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X
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HOW COULD THIS BE DONE
I have taken the uncovered Greek
Kitlos PLC structure that exposed the
magnitude of the Greek accounting ‘games’ and which has now
placed Greece on the verge of financial collapse and used it has a guiding
model. It is very clear that a similar structure could be used in the US.
Goldman Sachs clearly had a ‘cookie cutter’ solution which it
took to Greece.
Where the recipe was origianlly developed we likely will find out
during the next financial crisis.
THE FOLLOWING GRAPHIC IS AN EXAMPLE ONLY. IT DOES NOT REPRESENT THIS
IS ACTUALLY OCCURRING NOR DOES IT REPRESENT THAT THE PLAYERS LABELLED
IN THE DIAGRAM ARE OR EVER HAVE PARTICIPATED IN SUCH A MANNER. THE FLOWCHART
DOES NOT REPRESENT THAT THIS IS THE ONLY WAY SWAPS COULD BE USED
IT IS A REPRESENTATIVE EXAMPLE ONLY AND IS FOR ILLUSTRATIONAL
PURPOSES ONLY.
For further explanation: See Kitlos PLC
Structure & Sultans of Swap:
Understanding %605 Trillion in Derivatives.
RELATING OUR SUSPICIOUS CLUES (SC) – SC# 1-9
If demand was not sufficient to meet supply because it
was falling off (SC#1 and SC#3), then the proposed structure would provide
funds to purchase US Treasuries at the Treasury Auction as Direct Bidders
(SC#2). The Direct Bidders would have to come from offshore havens (SC#9) so
it wouldn’t be readily apparent that there was a US Treasury funding
arrangement. If it was widely understood then its purpose would not be
successful.
Collateral from PPP/PFI assets would need to be posted and it would
likely require further direct deposited funds at the US Treasury to achieve
full collateral coverage (SC#6).
Presently US banks are being recapitalized by the use of an
extraordinary steep yield curve, this along with major accounting
changes was the most expedient
political solution to the insolvency of the US
banking industry instead of being nationalized as was debated at the onset of
the financial crisis. The spread between the 10 Year US Treasury and the Fed
Discount / Primary credit rate is over 3%. This is a high that has only been
seen a few times in the last 30 years. In the few other times, inflation was
also never this low. Is it any wonder that bank profits just released are eye
popping?
Borrowing short and lending long is the basis of banking, but seldom
have we ever made it this profitable or easy for the banks. All of these
actions are at the tax payers’ expense. With 30 Year Treasury Bond
yields minus the 6 month CD at a high only seen twice before since 1986, it
discourages private savers. As Adrian Ash points out in “How the Banks Print
their Money”:
"In effect," gasps one commentator, "American taxpayers are now subsidizing the
profits of Wall Street." He puts the profit at "200 basis points
and up."
"The easiest and most profitable risk-adjusted
trade for the banks," swoons another, "is to borrow billions from the Fed...and
then to lend the money back to the US Treasury. The imbedded profit –
of some 2.5 percentage points – is an outright and ongoing gift from
American taxpayers to Wall Street."
But where's the shock? American and British
taxpayers have long subsidized Wall Street and the City. Progressively more
so over the last 25 years, sure. Without any payback since 1981, in fact. And
spectacularly so during the last 3 recessions, too. Just check out those peaks above
But 'twas ever so, at least since "Big
Bang" in the mid-1980s. Nothing much in this scam is new. Banks print
money, quite literally and despite the monopoly that the Fed and Bank of
England apparently hold. Only the pace of production has picked up as the
number of forgers has shrunk, leaving a small but swollen cartel of banks
running the racket. And to keep the cops off their back, they've got
tax-payers hostage, and will keep them tied up, for as long as "saving
the banks" – instead of just letting them fail – remains the
approved political fix.
I was tempted to include as SC#10 - the fact that the Federal Reserve
hurriedly added paying interest on bank reserves deposited at the Fed during
the financial crisis. Bank reserves required by law and any additional funds
above the minimal requirements now earn interest. This has never been done in
the history of the Federal Reserve. I raise it now because it seems strange
to pay banks to hold reserves above minimal requirements when the major
concern is that banks are not lending. Why would you reward this behavior? Is
it possible we are rewarding the banks for buying US Treasuries which would
then be held on deposit at the Federal Reserve? Think of the profit on this
arrangement. The banks borrow unlimited funds from the Federal Reserve at
nearly zero interest rates, and then buy US Treasuries at close to 3.5%. The
banks then put the notes on deposit at the Federal Reserve and are paid
interest on the face value of the Treasuries. Of course the fool in all this
is “we the tax payer”.
If alternative financing was being used then sudden lending spikes at
commercial banks (SC#4) would likely be seen when urgent cash management
funds were needed or a monthly Treasury Auction was going to be possibly
uncovered. You would also see inflows into government outlays (SC#8) when
receipts were too light and had the potential to be a shock and possible
contagion catalyst to the Treasury Auction.
You would also expect to see Interest Rate Swap Spreads between the 10
Year US Treasury notes to also plummet and possibly go negative (SC#5).
To keep this whole gig going with low perceived low inflation you
would require an extraordinary complacent Gold and Precious Metals market
(SC#7).
Of course this is just one person’s view.
CONCLUSION
What I have attempted to do with my speculation is to create a
‘straw man’. It is intended as a starting point from which to
begin the discovery process for the truth. I am likely wrong in a number of
areas. That is part of discovery. Someone has to put themselves out
there to begin the dialogue. I look forward to hearing from readers who can
add to the discovery of the real truth.
GOVERNMENT SACHS TELL US THE TRUTH
"You want the truth? You can't handle the
truth. Son, we live in a country with an investment gap. And that gap needs
to be filled by men with money. Who's gonna do it? You? You, Middle Class
Consumer? Goldman Sachs has a greater responsibility than you can possibly
fathom. You weep for Lehman and you curse derivatives. You have that luxury.
You have the luxury of not knowing what we know: that Lehman's death, while
tragic, probably saved the financial system. And that Goldman's existence,
while grotesque and incomprehensible to you, saves pension funds. You don't
want the truth. Because deep down, in places you don't talk about at parties,
you want us to fill that investment gap. You need us to fill that gap.
"We use words like credit default swaps, collateralized debt obligation,
and securitization? We use these words as the backbone of a life spent
investing in something. You use 'em as a punchline. We have neither the time
nor the inclination to explain ourselves to a commoner who rises and sleeps
under the blanket of the very credit we provide, and then questions the
manner in which we provide it! We'd rather you just said thank you and paid
your taxes on time. Otherwise, we suggest you get an account and start
trading. Either way, we don't give a damn what you think you're entitled
to!"
As Posted on
Calculated Risk
SOURCES:
(2) 04-26-10 - Goldman Sees A $10.8T Budget Deficit In Next
Decade, Focuses On Subpar Tax Receipts ZeroHedge
For the complete unabridged version of this article see: EXTEND & PRETEND
For the complete Extend & Pretend series: Commentary
Gordon T. Long
Tipping
Points
Mr. Long is a
former senior group executive with IBM & Motorola, a principle in a high
tech public start-up and founder of a private venture capital fund. He is
presently involved in private equity placements internationally along with
proprietary trading involving the development & application of Chaos
Theory and Mandelbrot Generator algorithms.
Gordon
T Long is not a registered advisor and does not give investment advice. His
comments are an expression of opinion only and should not be construed in any
manner whatsoever as recommendations to buy or sell a stock, option, future,
bond, commodity or any other financial instrument at any time. While he
believes his statements to be true, they always depend on the reliability of
his own credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory agencies
in your legal jurisdiction, before making any investment decisions, and
barring that, you are encouraged to confirm the facts on your own before
making important investment commitments.
© Copyright 2010 Gordon T Long. The
information herein was obtained from sources which Mr. Long believes
reliable, but he does not guarantee its accuracy. None of the information,
advertisements, website links, or any opinions expressed constitutes a
solicitation of the purchase or sale of any securities or commodities. Please
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this possibility before investing in any security based upon statements and
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receive from him.
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