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Author Topic:   There Are No Free Markets
Richard Kurtzman
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iconnumber posted 03-31-2010 10:29 AM     Click Here to See the Profile for Richard Kurtzman     Edit/Delete Message   Reply w/Quote
One often hears that we should leave the markets to work their way. "The free market will take care of itself." Unfortunately there is no such thing as the free market.

Listen to this audio of silver trader Andrew Maguire blowing the whistle and telling how the silver market and other metals markets are manipulated and how there is fraud on a massive scale by our good friends at JP Morgan, Goldman Sachs et al.
[<gone from the internet> .kingworldnews.com/kingworldnews/Broadcast/Entries/2010/3/30_Andrew_Maguire_%26_Adrian_Douglass.html]
Andrew Maguire Adrian Douglass

MP3 file here

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Scott Martin
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iconnumber posted 04-01-2010 10:16 AM     Click Here to See the Profile for Scott Martin     Edit/Delete Message   Reply w/Quote
I think this is real scary sounding. There are parallels with the other recent and pending financial crises in housing, banking, insurance, etc. I also suspect the reason we are not hearing more about "paper gold" in the mainstream media is that it is much more complex and that the primary players are larger; like countries or institutions (some larger than many small countries).

I am still trying to wrap my head around all this.... the more I do, the scarier it gets and the more complex. In the event of a "run" on gold I expect most of the larger players are not prepared to actually take delivery if they could. So delivery will be in paper currency. Who's currency and what is the impact to the currency and global currencies?

I am beginning to realize that the players in this have always and most likely continue to do everything with a wink and a nod. So I am suspect of this "news" as being just another bit of gamesmanship.

What I am afraid of is that humanity's ethical fundamentals are slipping away across the board in all things. And that wining the game today (any game) is becoming the only point and that ethical considerations for the future are not considered and are pushed into "we can fix it later" or "it's someone else's problem".

It seems to me, as the fundamentals slip away, the community of man is about to enter a new dark age.

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salmoned

Posts: 336
Registered: Jan 2005

iconnumber posted 04-05-2010 05:25 AM     Click Here to See the Profile for salmoned     Edit/Delete Message   Reply w/Quote
The discussion is proof of how extremely free the markets really are, actually. The manipulations and reputed frauds simply exemplify additional degrees of freedom, especially the freedom to live beyond one's means. The 'revelation' that contracts for 100 times the amount of gold held are traded is nothing alarming or new - I can write a contract to deliver gold without actually holding any just as easily as I can buy a contract for gold delivery without having or paying the full purchase price upfront. That's how the markets operate and this is not news, much less alarming news.

Perhaps I'm simply oblivious to the scary stuff, but I don't find anything to really worry over here. I assume most of us in this forum have or have had a mortgage or credit cards, lent or borrowed money. That's all that's going on.

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salmoned

Posts: 336
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iconnumber posted 04-05-2010 05:06 PM     Click Here to See the Profile for salmoned     Edit/Delete Message   Reply w/Quote
As for erosion of ethical fundamentals, well, has anyone here ever bought a beautiful object, held it for a while (2 seconds or 10 years), then sold it for more than you paid without having added anything to it's value? Rather unscrupulous, eh?

[This message has been edited by salmoned (edited 04-05-2010).]

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Richard Kurtzman
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iconnumber posted 04-05-2010 09:08 PM     Click Here to See the Profile for Richard Kurtzman     Edit/Delete Message   Reply w/Quote
Hi salmoned,
Please correct me if I am wrong. Are you saying that the freedom to be dishonest indicates how truly free the markets really are?

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DB

Posts: 252
Registered: May 2006

iconnumber posted 04-05-2010 11:02 PM     Click Here to See the Profile for DB     Edit/Delete Message   Reply w/Quote
No Richard, I think salmoned meant there is nothing wrong with making a profit.And this is how the market works, in order that somebody makes a profit, another has to take a loss. Tough, but you don't have to get in.

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salmoned

Posts: 336
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iconnumber posted 04-06-2010 06:49 AM     Click Here to See the Profile for salmoned     Edit/Delete Message   Reply w/Quote
Close. What I really suggested was that one must define and delineate ethical behavior before one can call a specific behavior ethical or unethical. One may 'know ethical and unethical behavior when one sees it', but one's standards are far from universal and may involve a considerable dose of hypocrisy when shifting one's frame of reference.

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DB

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iconnumber posted 04-06-2010 11:35 AM     Click Here to See the Profile for DB     Edit/Delete Message   Reply w/Quote
Well said.

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Richard Kurtzman
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iconnumber posted 04-06-2010 12:34 PM     Click Here to See the Profile for Richard Kurtzman     Edit/Delete Message   Reply w/Quote
Hi salmoned,
Just want to make sure I understand this. Your suggesting that honesty and ethics are in the eye of the beholder and that they are relative?

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Scott Martin
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Posts: 11377
Registered: Apr 93

iconnumber posted 04-06-2010 01:33 PM     Click Here to See the Profile for Scott Martin     Edit/Delete Message   Reply w/Quote
Let's say I have an item of hollowware, a vase, made by the world famous but deceased silversmith Tim Smith. Since Tim Smith is deceased there is a limited supply of Smith Vases in the world

I put a Smith Vase up for auction. It sells to person1 because they are the high bidder. Person1 gets a certificate that says they own a Smith Vase but I will retain possession of the Smith Vase. In the future, if person1 wants to take possession of a Smith Vase then they have to ask for it. If I can't deliver a Smith Vase then I have to send them paper money equaling the then current market value of a Smith Vase.

I also sell the Smith Vase in the same way to other bidders; person2, peerson3, person4...person120.

One day person4 & person16 decide they must take possession of a Smith Vase. Since person16 asked first they get the single Smith Vase I have. For person4, I must promptly find and deliver another Smith Vase. Since I can't promptly locate another Smith Vase then I have to pay person16 paper money equal to the then current market value of a Smith Vase.

What happens when the other "owners" (certificate holders) of a Smith Vase hear that a Smith Vase can't be delivered?

First I expect any person who really possess a Smith Vase will find the value of the real Smith Vase starts going up significantly.

Now that the market for a real Smith Vase is going up, it becomes very difficult for me to meet my obligation to provide the other "owners" (certificate holders) with a Smith Vase. Since I can no longer afford to purchase a Smith Vase, I have to start paying the market rate to those "owners" (certificate holders) wanting to take possession of a Smith Vase. At some point I no longer can afford to pay the current market rate to the "owners" (certificate holders) and I default to the balance of the "owners" (certificate holders).

This results in another significant increase in the value of the limited supply of real Smith Vases and at the same time the Smith Vase certificates become pretty much worthless. (I suppose this is where some smart cookie could package up the remaining certificates and give the package a fancy name like Credit Default Swap....)

If the holders of the certificates have used the certificates as collateral in other transactions then those transactions become unsecured. If this happens on a large scale then things start to look bad for those who don't possess tangible assets. Those with only paper assets (i.e., paper money or certificates) will find the cost to buy necessities requires more and more paper money. etc etc etc.

Ethically ... should I have sold a Smith Vase over and over when I didn't have the additional Smith Vases and/or the ability to cover my obligations with Smith Vases or enough paper money for all the certificates (especially in the event of a market run up)?

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vathek

Posts: 962
Registered: Jun 99

iconnumber posted 04-06-2010 04:05 PM     Click Here to See the Profile for vathek     Edit/Delete Message   Reply w/Quote
Well said Scott. It's that current ability to rationalize all sorts of behavior that has thrown ethics out the window (and a lot of innocent people's 401k's along with them).

In Scott's example tho, Scott would apparently get off 'scot' free and be promoted and continue to receive large bonuses for selling vases he doesn't actually own.

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Sgt Silver

Posts: 41
Registered: May 99

iconnumber posted 04-06-2010 07:34 PM     Click Here to See the Profile for Sgt Silver     Edit/Delete Message   Reply w/Quote
Vathek, where Scott would get the Big Bucks would be from packaging all those worthless certificates of ownership and selling the package - slice by slice. Then he would create a market for those slices, and after he sold them all, he would sell them again (Shorting the market) because he knows that, fundamentally, they are worthless!

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salmoned

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iconnumber posted 04-06-2010 08:50 PM     Click Here to See the Profile for salmoned     Edit/Delete Message   Reply w/Quote
Okay, I'll go a little bit farther. Are you suggesting that financial credit is unethical? I know Islam teaches that loaning money with interest is immoral, do you believe that as well?

If I borrow money at 5% and loan it at 8% am I unethical? What if I insure against loss of principal by paying 1% for insurance against debtor default? What if I loaned the money to unworthy borrowers (with government incentives) and doubly insured against default? Where exactly is the line for ethical/unethical behavior and who has crossed it - me, the borrowers, the insurer, the government? Or is the whole system unethical?

I don't know if any of this is helping you understand how notional is the concept of ethical behavior. Just like beauty, it is only in the mind of the beholder.

[This message has been edited by salmoned (edited 04-06-2010).]

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ahwt

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iconnumber posted 04-12-2010 12:16 AM     Click Here to See the Profile for ahwt     Edit/Delete Message   Reply w/Quote
Public Radio International had an interesting program on today about the Magnetar hedge fund that helped create assets that they later sold short.

I think that your analysis is correct Scott.


quote:
Magnetar Trade: How one hedge fund helped keep the bubble going"

Update June 21, 2011: JP Morgan Chase has agreed to pay a $154 million penalty to settle SEC charges that the bank misled investors about a complex mortgage-securities deal during the waning days of the housing boom. The SEC charged that JP Morgan neglected to tell investors that the hedge fund Magnetar helped create the deal and was betting against it. This story was the first to detail Magnetar's role.

Update Oct. 29, 2010: This story has been corrected in response to a recent letter from Magnetar.

In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Subprime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe.

At just that moment, a few savvy financial engineers at a suburban Chicago hedge fund helped revive the Wall Street money machine, spawning billions of dollars of securities ultimately backed by home mortgages.

When the crash came, nearly all of these securities became worthless, a loss of an estimated $40 billion paid by investors, the investment banks who helped bring them into the world, and, eventually, American taxpayers.

Yet the hedge fund, named Magnetar for the super-magnetic field created by the last moments of a dying star, earned outsized returns in the year the financial crisis began.

How Magnetar pulled this off is one of the untold stories of the meltdown. Only a small group of Wall Street insiders was privy to what became known as the Magnetar Trade. Nearly all of those approached by ProPublica declined to talk on the record, fearing their careers would be hurt if they spoke publicly. But interviews with participants, e-mails, thousands of pages of documents and details about the securities that until now have not been publicly disclosed shed light on an arcane, secretive corner of Wall Street.

According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations -- CDOs. If housing prices kept rising, this would provide a solid return for many years. But that's not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.

Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.

Magnetar says it was "market neutral," meaning it would make money whether housing rose or fell. Dozens of Wall Street professionals, including many who had direct dealings with Magnetar, are skeptical of that assertion. They understood the Magnetar Trade as a bet against the subprime mortgage securities market. Why else, they ask, would a hedge fund sponsor tens of billions of dollars of new CDOs at a time of rising uncertainty about housing?

Key details of the Magnetar Trade remain shrouded in secrecy and the fund declined to respond to most of our questions. Magnetar invested in 30 CDOs from the spring of 2006 to the summer of 2007, though it declined to name them. ProPublica has identified 26.

An independent analysis commissioned by ProPublica shows that these deals defaulted faster and at a higher rate compared to other similar CDOs. According to the analysis, 96 percent of the Magnetar deals were in default by the end of 2008, compared with 68 percent for comparable CDOs. The study was conducted by PF2 Securities Evaluations, a CDO valuation firm. (Magnetar says defaults don't necessarily indicate the quality of the underlying CDO assets.)

From what we've learned, there was nothing illegal in what Magnetar did; it was playing by the rules in place at the time. And the hedge fund didn't cause the housing bubble or the financial crisis. But the Magnetar Trade does illustrate the perverse incentives and reckless behavior that characterized the last days of the boom.

Magnetar worked with major banks, including Merrill Lynch, Citigroup, and UBS. (From left: Daniel Barry/Getty Images; Jonathan Fickies/Bloomberg News; Seokyong Lee/Bloomberg News)
At least nine banks helped Magnetar hatch deals. Merrill Lynch, Citigroup and UBS all did multiple deals with Magnetar. JPMorgan Chase, often lauded for having avoided the worst of the CDO craze, actually ended up doing one of the riskiest deals with Magnetar, in May 2007, nearly a year after housing prices started to decline. According to marketing material and prospectuses, the banks didn't disclose to CDO investors the role Magnetar played.

Many of the bankers who worked on these deals personally benefited, earning millions in annual bonuses. The banks booked profits at the outset. But those gains were fleeting. As it turned out, the banks that assembled and marketed the Magnetar CDOs had trouble selling them. And when the crash came, they were among the biggest losers.

Some bankers involved in the Magnetar Trade now regret what they did. We showed one of the many people fired as a result of the CDO collapse a list of unusually risky mortgage bonds included in a Magnetar deal he had worked on. The deal was a disaster. He shook his head at being reminded of the details and said: "After looking at this, I deserved to lose my job."

Magnetar wasn't the only market player to come up with clever ways to bet against housing. Many articles and books, including a bestseller by Michael Lewis, have recounted how a few investors saw trouble coming and bet big. Such short bets can be helpful; they can serve as a counterweight to manias and keep bubbles from expanding.

Magnetar's approach had the opposite effect -- by helping create investments it also bet against, the hedge fund was actually fueling the market. Magnetar wasn't alone in that: A few other hedge funds also created CDOs they bet against. And, as the New York Times has reported, Goldman Sachs did too. But Magnetar industrialized the process, creating more and bigger CDOs.

Several journalists have alluded to the Magnetar Trade in recent years, but until now none has assembled a full narrative. Yves Smith, a prominent financial blogger who has reported on aspects of the Magnetar Trade, writes in her new book, "Econned," that "Magnetar went into the business of creating subprime CDOs on an unheard of scale. If the world had been spared their cunning, the insanity of 2006-2007 would have been less extreme and the unwinding milder."


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Scott Martin
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iconnumber posted 04-13-2020 04:06 PM     Click Here to See the Profile for Scott Martin     Edit/Delete Message   Reply w/Quote
As the shadow of Covid-19 continues to impact the market ... Will gold and silver prices go up? And will people insist upon delivery in lieu of certificate guarantees?

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