Maybe it’s because the market is making me queasy, I didn’t watch the action today.

I know gold has broken out, to all appearances, but over the last several years, appearances have been knocked out of the ring more than once.

Walking Montevideo’s streets – even in the rain (and it’s been raining the past day or so) – takes my mind off all the feverish commentary from gold bugs and bashers – the sum total of which spells WE DON’T KNOW.

In the next few weeks, the break-out will either be confirmed or dispelled and then the lucky soothsayers will pat themselves on the back (and why not?), declare their genius, and make the rounds of the talking shows as the new Merlins of the Market. Reporters will get to shoot off snappy little missives about equities “plunging” or “soaring” or “sliding.” Each time the reason will be different. In between, we will have the entertainment of trying to pin the tail on the billion dollar donkey – Goldman Sachs. The donkey will kick occasionally and poor Matt Taibbi will get custard in his face for trying to educate the masses. And so it goes on.

Gold was said to be following the equity market and moving against the dollar. But then today the markets went to 10,000 and gold stumbled a bit, while the dollar index stayed low (mid 75’s).  If gold is the new money, that makes sense. It stayed down, like the dollar. What drives it? I’d say speculation, right now. When equities look solid, gold slips, along with money. At least, that’s my five minutes worth of tea-leaf reading. Tomorrow, gold will move against money, and then we can all go back to the old refrain about inflation expectations driving gold.

Onto other things.

Who said Montevideo was cheap? It’s not, though I hear Brazil is more expensive. A young pharmacist, struggling alone on the street with his three month year old daughter and my bad Spanish, gave me the lowdown. His electric bill was around $US200/mth. That’s for a man, his wife and two children. His food bill runs to about $US200/mth. His gas bill was around $US50. That’s the same or a bit more than many families in the US. And in Uruguay, $US500-$1000/mth is a good salary. So food is really about three times more expensive than in the US.

People are careful with the lights. Which I’m used to, from India.  Last night, my landlady Gabriela was groaning about the German woman who lived in my room last year. She ran a hot shower three times a day and used the hair dryer incessantly.  Gaby said she was going to switch to gas to heat the water. Gas is cheaper here.  She goes through 2-3 cans of gas a month for her space heaters and it comes to about a thousand pesos a month.

Montevideo has enough of a gay culture that someone can run a hotel catering to male couples, impeccably maintained and done up. Exposed brick, walls with stenciled designs, ikebana, polished wood, a flower garden, a kennel, and a tub on the terrace. It charges $50 a day for a couple, breakfast included. A good business.

Revitalize the inner cities? Just drop a squadron of gays into them.

And over at the Washington Times, Jeffrey Kuhner asks an incredible question (October 4, 2009):

“Mr. Ahmadinejad insists Tehran only wants atomic energy for “peaceful purposes.” Yet, he cannot answer one simple question: Why does a country with the world’s second-largest natural gas reserves and third-largest oil supply need domestic nuclear power?

The answer, Mr. Kuhner, is to avoid the fate of Iraq.

At Dealbreaker, Greg Michaels asks an important question:

“A day after people threw both questions and shoes at IMF chief Dominique Strauss-Kahn, he said that the organization’s new mandate is to be the global lender of last resort.

The international monetary system must be more stable, and anchored by a global lender of last resort,” he said, outlining his vision for the IMF.

So now we’re going to have the IMF there to cushion the world from another near economic meltdown. It’s a simple as that. Problem solved. What could possibly go wrong.”

Hedge funds are increasingly moving out of trading in futures to directly investing in physical commodities, increasing the possibility of a dangerous shortage of those commodities:

Martin Hutchinson:

“Only when the gold price breaks definitively downwards, dropping 25% or more from its high, will policymakers know that they have succeeded in breaking the commodity investment mania. Such a development is however likely to occur only after a definitive crack in government bond markets, forcing policymakers to address their gigantic budget deficits as a matter of urgency.

Given the predilections of today’s policymakers, it is unfortunately unlikely that they will tighten monetary policy sufficiently to break the commodity flight, whatever the gold price does. Instead, led by the determined Keynesians of the International Monetary Fund, they are much more likely to attempt to control the gold price itself, either surreptitiously by selling off massive quantities of the world’s gold reserves, or openly by imposing limits on gold futures trading and possibly, like Franklin Roosevelt in 1933, making it illegal for ordinary individuals to own gold or to buy gold futures.

That will of course only make matters worse; it would be equivalent to trying to avoid a speeding ticket by smashing the car’s speedometer. Manipulating the gold price to pretend that liquidity is not excessive does not stop liquidity from being excessive. Nor does it lead any but the stupidest institutional investor to believe that his urge to invest in physical commodities is misguided. Rather, it will cause commodities investment to be carried out through shell companies in tax havens, away from regulators’ radar screens. The effect on global supply chains will be equally damaging, but policymakers will no longer have a straightforward way of determining how to avoid the resulting economic depression.

I wrote last week that tightening liquidity directly by entering into a central bank “exit strategy” is dangerous. However , the Financial Time’s story itself and the gold price breakthrough have significantly increased the size of the hike in interest rates necessary to halt the flight to commodities.

Time is short and the probability of disaster is rising.”

An interesting India connection with Penson, the clearing house and broker-dealer alleged by Matt Taibbi to have trading software that lets facilitates naked short selling (note: this is from October 2007):

“ICICIdirect.com, the online broking arm of ICICI Securities, today launched its overseas trading service that will allow its resident Indian customers to buy and sell equities across 13 US stock exchanges, including NYSE and Nasdaq.

ICICIdirect.com has tied up with Penson Financial Services, the fourth largest clearing and broker-dealer company in the US, as its overseas trading partner. Penson Financial Services handles about 10,00,000 settlements everyday and has over $6.8 billion in assets, including customer assets.”

My September 2008 piece in Lew Rockwell, the Paulson Putsch, had a very interesting history I’ve often thought about.

Unlike my other pieces, it wasn’t linked…and kind of “faded.” It ended up on a website called “assassinated press.” Why the difference? Because it went to Counterpunch, a left wing site. It got reprinted a lot. A week later, Gretchen Morgenson, broke her story about Blankfein (Goldman CEO) sitting in on the AIG bail-out proceedings with Geithner and Paulson (if I have that right). Now, Morgenson, as far as I know, has never written on Goldman (correction: I should say, on the corruption of Goldman) before. I’m pretty certain she got the lead from my piece, as my piece was the only one then to make the connection.

What’s interesting is that only a week or so earlier I’d written a piece on the AIG-Goldman link that got traction.

The week after, it hit me that the bail-out proposal was the culmination of Goldman’s history of criminality, which I’d already researched in 2006 for another book. I hastily put together what was relevant, and sent Lew Rockwell the piece, “The Paulson Putsch,” which is basically Taibbi’s whole recent Goldman thesis in Rolling Stone and elsewhere in a nutshell. I figured people would follow up on it.

But, as I said, unlike the AIG-Goldman piece (Lipstick on an AIG), this one simply got ignored. Too conspiratorial? I don’t know. No more than Taibbi’s – which is kosher enough now for Amy Goodman, bless her heart, to think about.

Anyway, among the many appreciative readers (including Carl Sagan’s son and some well-placed businessmen) who wrote to me, there were a couple of southerners who said they would fax it to everyone they knew in public office. And indeed they did. The next day, A couple of days later on Saturday, I kid you not, Newt Gingrich, who until then had been very deferential toward Treasury Sec. Paulson on TV shows, comes out and calls Paulson “unamerican”. Then, a day or two later, he reverses course and says he’s a patriot. I wish I’d been able to tape the show and I wonder if someone has the show on file somewhere. It was very bizarre and apart from my own glee at having what I thought was a bit of impact on the debate (even if completely unacknowledged), I’ve gone back over and over and tried to figure out what that reversal meant. I’m recalling it entirely from memory now.

Here’s the Paulson Putsch (Sept. 2008):

It covers Goldman’s prior history, naked short selling, the SEC, Rubin, Goldman’s derivative packaging, and and is Taibbi’s recent pieces in a nutshell. Now here’s Amy Goodman’s interview of Taibbi over his Goldman conspiracy piece.

And here’s his Rolling Stone piece, The Great American Bubble Machine.

I’m also fairly certain that MT’s naked short-selling interest is recent. I note that it followed blog posts of mine on Deep Capture. – that may (or may not) be coincidental.

Mind you, I’m glad Taibbi at least knows a story when he sees one. Popularizing the story is important, no doubt of it. He deserves credit for having that much clarity and courage.

But it’s as important to note what parts of the story he misses out: those are 9-11, the Federal Reserve, interest rate manipulation, gold. And since this is the smoke and mirrors that is the US media, that is precisely the heart of the story.

Beating the drum about Goldman Sachs (and why not JP Morgan?) a year after strikes me a lot like a story of the dollar collapse showing up on the cover of Time. It means the horse has already bolted. And someone is looking hard in an empty stable.

The gold price popped up to a new high above 1060, after Monday’s holiday. It’s apparently become the favored speculative play in China:

“Chinese investors are [also] placing leveraged bets,” says Wei Gu, a blogger for Reuters in Beijing.
“Leverage is not allowed in China’s stock market, so people eager to maximize their returns have flocked to gold trading.”
The People’s Bank of China recently vowed to continue with what it called an “appropriately loose monetary policy,” holding interest rates at record lows.
Xinye Bank, which trades through the Shanghai Gold Exchange, grew its client gold dealing three times over during the first half of ’09, trading $3bn worth of contracts.
“Customers are allowed to borrow as much as 90% of the value of the gold contracts they buy,” says Wei.Noting that several large hedge funds and other speculative players are now seeking to buy physical commodities outright – and thus avoid the “position limits” imposed by US regulators on energy and raw material derivatives – “The gold price is available to show policymakers whether their monetary policy is appropriate,” writes Martin Hutchinson at Prudent Bear.”

More by Adrian Ash at Bullion Vault, via Goldseek.

Update: Please check this post for Byrne’s and Bagley’s later comments.

Here’s Penson Financial Services Letter To SEC “Penson’s letter calling the video a hoax or worse.

Update (Tuesday, Oct 13)

The Penson letter (dated October 6) calls Taibbi an “apparent freelance blogger”. This strikes me as odd. They couldn’t be bothered to figure out his credentials first, before attacking him?
The video they reference first is the October 5 video on True Slant, where Taibbi now blogs.

They then cite this youtube video, dated October 1, as the source: http://www.youtube.com/watch?v=pKQdQ0T9IkE. It’s titled “Penson Approves Billion Share Naked Short” and the source is listed on Youtube as Naked Short Sales

Here’s the next version (dated October 2 ) cited in the letter, which has CITI as the stock being sold
http://www.youtube.com/watch?v=rXIZZOwaiCM&NR=1

It’s titled “thetrade” and the source is given as TrueSlant (Taibbi’s blog)

In the October 1 video, the company to whom the shares belong is anonymous, the timestamp in the locate prompt is 10:57:08 and there is an 8 preceding the multiple zeros (?)

In the October 2nd version, the anonymous company is now Citi, it’s a Level II trading station, and the time-stamp on the locate is 10:57:00 (it’s blurred so I could be mistaken) and there is no preceding number for the locate size. I notice everyone refers to the figure as tens of billions, but if there were 9 zeros that would be unitary billions. So perhaps, it is 10 zeros.

I’m sure I’ve missed a lot of stuff….or misunderstood. But trading platforms look very different, and I’m not familiar with this one. Professional traders who’ve used a lot of trading software might be able to make a better judgment.

Aha – maybe here’s why it didn’t look like an order entry in that screen, this blogger says its an entry of an audit trail point asking who the stock was borrowed from, how much, and when – to prevent naked short-selling.

I don’t think this entirely blows away Taibbi, as some think, though it does show haste and sloppiness.

The letter is signed by Penson’s Associate General Counsel, Tim Wise, and it’s addressed to the SEC
and FINRA.

Update (Tuesday, Oct 13)

The video is described at length on a lot of sites (Taibbi’s, Clusterstock, Megan McArdle).
I still can’t read the pop-up that’s supposed to show that the order was canceled
(Update: this is the second order, the one that’s irrelevant to the locate, according to Taibbi’s second post).

To make it clear, there are two orders shown on the video, as best as I understand it. The first one is for 100 shares for a short sale, which is rejected at first, because the shares are hard to locate (that’s at the start of the clip). This leads to a prompt that the trader fills out, supposedly asking for a locate of the shares, which is given in a multiple of billion (?) –  I couldn’t catch all the zeros – 9 or 10, I think. This is the locate which Taibbi says is shady, since the company’s float is for 5.5 billion.

Then there is a trade (which Taibbi says is irrelevant), whose actual size on the top left of the screen goes from 100 to 1000 to 9000 – (that’s the second trade that has the pop-up) – that’s rejected.

I fail to understand why the tape wasn’t cut after the locate, if that was the main point.

Frankly, I can’t make out whether the video shows what Taibbi says it does or not, and I can’t read the (irrelevant) pop-up.

Taibbi does back-track, but rather unconvincingly, because the text of what he wrote at True Slant certainly implies that the sale (and not just the locate) was of multi-billion shares, even if that was not his wording. The video is titled that way too.

If the locate is the issue, why not title and cut the video that way?Here is Taibbi’s original post:

“To disguise the identity of the trader, I’ve blocked out the first number in the sequence. But you can see that the number is in the tens of billions of shares. Now, the float for BANK X that day was only five and a half billion, meaning there were only five and a half billion BANK X shares in circulation. Without disclosing the actual number, I can tell you that the customer asked for a locate of shares in an amount that was at least five times the number of BANK X shares actually in circulation. Such a locate, in other words, could not possibly be filled.

:17 At seventeen seconds, at the bottom, you see that the firm Penson has now approved the trade and” located” the multibillion amount of shares. The trade goes through.”

Here is Taibbi back-tracking:

“Business Insider writer John Carney here seems to have read my recent post on Penson and taken from that that I was reporting that someone had executed a short sale of tens of billions of shares in a company whose float was only five and a half billion. This would, indeed, be ridiculous. Except that is not at all what I reported.

What I published was a tape of a trader asking for a locate of tens of billions of shares. It is the size of the locate, and the speed with which it is approved that is the issue, not the trade. The actual trade, if Carney had bothered to read the text, was only for 100 shares.

Carney then goes on to claim in another post that the “system” worked because a second trade was rejected at :27 on the tape. But this is a second trade for a larger amount of shares that was rejected not because of the locate but because the trader in question had insufficient funds in his account to make the short sale. It has nothing to do with the locate and is completely irrelevant to the story.”

My Comment:

Well, maybe so. But even if Taibbi himself wasn’t confused about what the video showed, the clip and his original commentary were misleading. Possibly, when he was writing in haste, he forgot that the sale was only for 100 shares and misspoke. In that case, he can hardly blame anyone else for misreading.

I’ll dig around to find out what Penson’s trading platform looks like and whether a locate of that size and speed is possible or impossible. So far this post was the most informative.
So much for the dangers of insta-punditry….

ORIGINAL POST:

This is one of several versions of a video supposedly showing a short-sale through Penson that’s the source of the trouble. I’ll be back later to find other versions of the video. (Update: I still haven’t found any of these other versions. There’s supposed to be one with Citi as the stock located)To recap, Matt Taibbi says it shows naked shorting, John Carney (of Clusterstock) says it shows the system worked as it should, Penson denies (sort of) that the video is its.

For a more detailed recap, see this long, dismissive blog post by Megan McArdle at The Atlantic.

There’s a little pop-up box about 25-26 seconds into the tape that for the life of me I couldn’t quite read. If I find a way to do that, I’ll comment on the video, but otherwise, I’ll pass…

(Penson holds one of my very diminished IRA’s, so I’m all agog if it happens to be connected to the Mafia – in this case, the Genovese mafia….)

Here’s the money part from Deep Capture on Penson:

“This is rather important, because Deep Capture has reviewed evidence showing that little Penson Financial and one other relatively unknown firm were by far the biggest traders in financial stocks in the first nine months of last year, handling more than 80 percent of volume. To repeat, Penson Financial, a little firm in Dallas, Texas, and one other relatively small firm handled by far the biggest volume of trading in the stock of all those big banks that collapsed last year, leading to the worst financial crisis since the Great Depression. When it came to clearing trades in financial stocks, Penson was bigger than Goldman, bigger than Merrill, bigger than every major brokerage on Wall Street.

We do not know for certain that the trading through Penson was naked short-selling. We know only that naked short selling accounted for much of the overall trading last fall in companies like Lehman Brothers. And we know that a preponderance of the overall trading went through Penson. Perhaps Penson carefully weeded out the naked short-sellers, in which case it handled almost all of the trading in financial stocks except for naked short selling. But if Taibbi’s video is any indication, Penson was certainly willing to locate stock that did not exist.

If I have anything to add to Taibbi’s terrific reporting, it is this: Penson Financial’s vice president in charge of stock clearing (that is, the head of the division that appears to have located stock that did not exist) is a man named Christopher Sandel. From 1985 to 1995, Sandel was a top executive at Adler Coleman, best known for being the clearing firm to the Genovese Mafia.”

And this, also from Deep Capture:

“In the letter, Penson Financial, which was fined in 2006 for naked short selling, promises that it does not engage in naked short selling”

OK. Here are the basic points in Penson’s letter denying naked short selling (as recapped at Clusterstock):

* “”The purpose of this letter is to inform you of an apparent hoax and unsupported accusation of a violation of Regulation SHO by Penson.”

* “The purpose of this letter is to inform you that Taibbi’s post is based on false information.”

* “While we are uncertain whether Taibbi’s article is the result of a hoax or something more deliberate…”

* “”There was no locate at the time of the video”

My Comment:

Carney seems to find this convincing. I don’t.

Why does Penson call this an “apparent hoax,” instead of an outright hoax? Is that just caution?

What does the phrase “something more deliberate” mean, and why use it at all?

“At the time of video” is pure legalese. There could have been a locate at any other time, then?

I don’t know about the video – I couldn’t read the pop-up and there are different versions out there.
But this letter smells fishy…

Carney writes:

“For us the clincher is the fact that Penson wrote the letter to the SEC. If they were a guilty party, they would have to be absolutely insane to do this.”

My Comment:

Well, no. Not if the SEC is thoroughly in bed with companies like Penson. Then of course Penson wouldn’t mind the SEC being alerted.

This piece in Investment News adds that Taibbi was given the video last week and hasn’t responded to the Penson letter. Penson denies that the trading platform shown in the video is theirs, and they say there was no locate of that stock in their records.

In one version of the video, the stock located is Citigroup, Penson said (as of now, I haven’t found that video).

Now, here is Gary Weiss, responding to the comment on Penson’s mob ties, from his own past research on the subject. The plot certainly thickens:

“1. Adler Coleman cleared trades for a rotten brokerage named Hanover Sterling, and, as I reported a good 13 years ago in a Business Week cover story, The Mob on Wall Street, Hanover was connected to the Genovese crime family. But it’s nonsense to claim that Adler “cleared” for the Genoveses, and there’s no evidence tying Adler to the Mafia.

2. Sandel is not in charge of stock clearing at Penson. He left that position two years ago. See this press release.”

From The Komisar Scoop, veteran investigative journalist Lucy Komisar – who was way ahead of the pack in her unraveling of the financial underworld – gives us a glimpse at a major hub of financial crime – off-shores havens:

“Secrecy havens have 1.2 percent of the world’s population and hold 26 percent of the world’s wealth, including 31 percent of the net profits of U.S. multinationals. According to Merrill Lynch & Gemini Consulting’s “World Wealth Report” for 2000, one third of the wealth of the world’s “high net-worth individuals” (as banks like to call them), nearly $6 trillion out of $17.5 trillion, may now be held offshore. Some $3 trillion is in deposits in tax haven banks and the rest is in securities held by IBCs and trusts.

Experts believe that as much as half the world’s capital flows through offshore centers. The International Monetary Fund (IMF) said that between $600 billion and $1.5 trillion of illicit money is laundered annually, equal to 2 percent to 5 percent of global economic output. These offshore centers awash in money are the hub of a colossal, underground network of crime, fraud, and corruption.”

My Comment:

Komisar, of course, is unreservedly for banking transparency. As a libertarian, however, I find this very problematic. It’s true that crooks abuse banking secrecy. But practically any rule is liable to abuse.

The conclusion isn’t to demand more banking transparency. Considering the volume of transactions in the markets, that would effectively mean more governmental authority. More governmental authority means less government transparency – which means we’ve substituted a gain of transparency in one area for a loss in another.

The logical conclusion is to remove the incentive for secrecy – which is taxation. Reduce taxation, and fewer corporations would be hiding money. The fewer groups with off-shore accounts, the easier to monitor secret transactions that seem to be criminal without harming the privacy of non-criminal secret accounts.

Why would non-criminals not want their financial transactions transparent?

1. Defense against litigation (deep-pockets often attract abusive lawsuits)
2. Claims from unscrupulous family members or business associates
3. Abuse by the government for political reasons; abuse by enemies and political partisans
4. Defense against other kinds of crime

Another libertarian approach would be to decriminalize drugs and end the Federal government’s corrupt pursuit of drug dealers. Instead, focus on the easier task – address the addictive demand for drugs.

A good analysis by Simon Johnson at Baseline Strategy, on why VaR (Value at Risk), a measure that was supposed to model risk but proved worthless, was preferred to more common-sense approaches:

“Given that everyone is agreeing sophisticated risk models are worthless in crises, it seems particularly remarkable that regulators allowed some banks to use their in-house models in determining their own capital requirements – since one of the purposes of capital requirements is precisely to provide a cushion that protects banks (and their creditors, and taxpayers) in the event of a crisis. The obvious solution is that regulators should rely on cruder constraints, such as an absolute limit on leverage that banks cannot arbitrage around (one of the recommendations of Treasury’s recent white paper on capital requirements, which we discussed here), or periodic stress tests that estimate how bank asset portfolios will perform in a real crisis.

But there is a more interesting question to ask as well: why did VaR become so popular? It’s important to remember that competition among models is shaped by the human beings who create and use them, and those human beings have their own incentives.

David Colander made this point about economic models: the sociology of the economics profession gave preference to elegant mathematical models that could describe the world using the smallest number of parameters. “Common sense does not advance one very far within the economics profession,” he says.

A similar point can be made about VaR models. Sure, maybe all the financial professionals who design and work with VaR know about its shortcomings, both mathematical and practical. But nevertheless, using VaR brought concrete benefits to specific actors in the banking world. If common sense would lead a risk manager to crack down on a trader taking large, risky bets, then the trader is better off if the risk manager uses VaR instead.

Not only that, but imagine the situation of the chief risk manager of a bank in, say, 2004. As Andrew Lo has argued, if he attempted to reduce his bank’s exposure to structured securities such as CDOs, he would be out of a job; VaR gave him a handy tool to rationalize a situation that defied common sense but that made his bosses only too happy. And at the top levels, CEOs and directors who probably did not understand the shortcomings of VaR were biased in its favor because it told them a story they wanted to hear.“

My Comment:

Of course, that is precisely the theme of “Mobs, Messiahs, and Markets.” The banking industry (and the real estate industry and the regulators and the buyers) were fooled, because – to a greater or lesser degree – most of them wanted to be fooled. Their own self-interest found it useful.

Mundus vult decipi. The world wants to be deceived.

Johnson being ex of the IMF (now housing the new global regulatory regime) is drawing the conclusion from this that you need to have tougher regulations. That leaves unsaid the “who will regulate the regulators” part of the equation. And even more importantly, it ignores the more fundamental problem of what drove this kind of speculative behavior, in the first place. The real problem is cheap money, not regulations, per se. Which takes you back to the Federal Reserve, rather than to the regulators or the banking industry.….. which goes back to fractional banking and the globalist cabal….which goes back to the whole world government project….which goes back to…well, you tell me, where that goes back to.

But you’ll never hear that from anyone in the MSM.