Tag Archives: Hank Paulson

Shankar Sharma: Some Insider Trading More Legal Than Others

Posted on by

At last. One honest journalist out there has the spine to tell the truth about the Western establishment’s vengeance against upstart South Asian finance,  known to the moron masses as the Galleon group/Gupta insider trading (non) case.

Here’s businessman and journalist Shankar Sharma in a piece that puts to shame the drivel emanating from the entire western press (Bloomberg included), not to mention the rags published by various Indian satraps (Livemint etc):

“On July 21, 2008, Hank Paulson, the then US treasury secretary, met around 15 major hedge fund managers at the offices of Eton Park in New York — itself one of the biggest hedge funds in the world. At least five of the 15 who attended were ex-Goldman Sachs, the firm that was headed by Paulson before he became the treasury secretary.

That very morning, Paulson had spoken to The New York Times reporters and editors and had assured them that the government was looking into the book of Fannie Mae and Freddie Mac, and that this would calm the markets that had been fearing an imminent bankruptcy of these firms.

This was material, non-public information, being selectively disseminated to a group of people whose jobs were to profit from such information. And, by no less than the serving treasury secretary. (Imagine the brouhaha if something like this were to happen in India.)

Those who attended were the who’s who of Wall Street: Taconic Capital, James Chanos of Kynikos Associates (a known short-seller), Steve Mandel of Lone Pine Capital, Dinakar Singh of TPG Axon, GSO Capital (part of Blackstone group), Daniel Och of Och-Ziff and Roger Altman of Evercore Partners.

Seven weeks later, on September 6, the government did indeed take over Fannie and Freddie and put it into conservatorship, wiping out the equity holders. Their stock prices fell 85 per cent from September 5 to September 6, i.e. overnight. Precisely as Paulson had told the hedge fund group.

The government gave scanty information on the names of those present at the July 21 meeting to Bloomberg, who sought this information under the Freedom to Information Act. Paulson’s press secretary told Bloomberg to refer to Paulson’s book on the financial crisis, On the Brink. Except for the little inconvenient fact that there is no mention of this meeting in the book at all.

Now, here is an interesting thing: the fund manager who recounted this tale to Bloomberg, was already short the stock at the time of the meeting. And, he did not cover his short position after this meeting because Paulson had clearly informed the group that the government was going to “wipe out the equity holders”. So, by not cutting his already short position in these names, that fund manager ended up profiting handsomely, by riding the short position all the way to the bottom… all based on Paulson’s generous advice.

And, what is even more significant is that given the negativity surrounding Fannie and Freddie at that time, it is almost given that nearly all those who attended that Paulson meeting would have been short these stocks. The whole world was short Fannie and Freddie (for the record, short interest in both these stocks rose after the July 21 meeting to hit a yearly high on July 24). Paulson revealing the government’s hand made the decision very easy for all these funds: “Don’t cut your shorts, since these stocks are going to zero.” Perfect.

What is even more curious is: why would Paulson reveal this to a bunch of hedge funds? Revealing this to commercial bankers would probably have some minuscule sense attached to it, i.e. to get them prepared for an impending catastrophe. But, hedge funds? And, an even more damning question arises: why would Paulson reveal negative information to these hedge funds, i.e. that the equity investors would get wiped out by the government takeover? This sort of information from a regulator/government official is unheard of: they are supposed to give out generally positive information, not catastrophic, unsettling information like this. Paulson’s information could lead to only two trading outcomes: one, hang on to your shorts in Fannie and Freddie, or, two, go short some Fannie and Freddie. This short-trade generating advice coming from a regulator, and that too a seasoned pro like Paulson, is extremely suspicious, to say the least.

If this is not giving out material, non-public information, then what is? If Rajat Gupta is guilty, why isn’t Paulson? If Gupta had given Raj Rajaratnam information that Goldman Sachs was going to get an investment from Warren Buffet (and suppose, if Rajaratnam had not sold an already long position in Goldman stock based on this material, non-public information), would this have amounted to a criminal offence on Gupta’s part?

Of the many things I don’t like about this Rajat Gupta affair, one is the Indian media’s sickeningly fawning portrayal of the American justice system as one that “doesn’t spare the rich and powerful, unlike ours where the well-connected get away”, and “how justice is dispensed speedily in the US”, and so on.

Nothing could be farther from the truth. The US protects its own rich and powerful better than we can ever do. Paulson got away clean. Not even an investigation. No investigation by the Securities and Exchange Commission into the trading by these attendee hedge funds. Nothing. Just a conspiracy of silence.

Then, we have the strange case of David Sokol. He was Buffet’s No. 2, and was widely tipped to take over from the old man. Sokol bought shares of Lubrizol, prior to getting Buffet to buy the company outright. After the deal was done, Sokol told Buffet of this purchase. Buffet waved it aside, saying it was no problem. No problem? Sokol traded on inside knowledge of material, non-public information, and Buffet joined him in keeping this a secret.

When the problem came out, Sokol resigned, Buffet shrugged. And, that was it. The cover up had happened. Because any serious investigation would have led to Buffet himself becoming a party to any offence, since he chose not to report this to the authorities. Consideration for his old age? Well…

But in the meeting with the hedge funds later that day, Paulson sang a completely different tune: he revealed in precise detail (according to someone who attended that meeting) what the government proposed to do with Fannie and Freddie. He told the elite group, whose sole business was to profit from any superior knowledge and analysis of events, that the government planned to seize the two firms, and place them into “conservatorship”: a move that would allow the firms to stay in operation, but would wipe out the equity holders.

Hanky-Panky At The Counting House

Posted on by

I thought I’d repost a piece that I wrote in Dissident Voice, way back in 2006. It helps give some background to the JP Morgan manipulation story.

And it also adds some background to the ongoing re-valorization of the once discredited IMF. Along with that re-valorization, is the hyping of anyone supporting even further central regulation, although the financial crisis occurred in all sorts of places that have plenty of it.

All this centralization and global government is supposedly for the welfare of the world – but there is no “welfare of the world” that can be safely accepted as gospel from the mouths of the financial industry and its political and media allies.

Note the date of the piece below – back on June 6, 2006, when, dare I say it, most of the financial talking- heads and blogs now being treated as the only legitimate interpreters of reality were doing…well, they weren’t reading GATA or supporting its work, I’m pretty sure. To have done so then would have made them persona non grata in the very same liberal media that is now embracing this research and that GATA, in turn, seems to be endorsing….for its own reasons..

Check it out for yourself.

Here’s an excerpt from the piece: “Hanky-Panky at the Counting House” (June 6, 2006)

Also, at Dissident Voice, you can find “Was The IMF Involved in Gold Price Manipulation” (June 8, 2006) which was also posted at Daily Reckoning and on one of the gold sites.  I think it’s been taken off Daily Reckoning since.

“The unofficial theory is naturally a lot juicier, although described by even sworn enemies of paper currency as conspiratorial. Still, it’s managed to rear its head in the Wall Street Journal, so it can’t be all wet. Here is what widely respected libertarian Congressman Ron Paul had to say on Feb 14, 2002:

While the Treasury denies it is dealing in gold, the Gold Anti-Trust Action Committee (GATA) has uncovered evidence suggesting that the Federal Reserve and the Treasury, operating through the Exchange-Stabilization Fund and in cooperation with major banks and the International Monetary Fund, have been interfering in the gold market with the goal of lowering the price of gold. The purpose of this policy has been to disguise the true effects of the monetary bubble responsible for the artificial prosperity of the 1990s, and to protect the politically-powerful banks that are heavy invested in gold derivatives. GATA believes federal actions to drive down the price of gold help protect the profits of these banks at the expense of investors, consumers, and taxpayers around the world.

GATA has also produced evidence that American officials are involved in gold transactions. Alan Greenspan himself referred to the federal government’s power to manipulate the price of gold at hearings before the House Banking Committee and the Senate Agricultural Committee in July, 1998: Nor can private counterparts restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise. [Emphasis added] (3)

More specifically:

Gold is borrowed by Morgan Chase from the Bank of England at 1 percent interest and then Morgan Chase sells the gold on the open market, then reinvests the proceeds into interest-bearing vehicles at maybe 6 percent.

At some point, though, Morgan Chase must return the borrowed gold to the Bank of England, and if the price of gold were significantly to increase during any point in this process, it would make it prohibitive and potentially ruinous to repay the gold. (4)

In plain English, the strong dollar policy that put the sizzle in the stock market under Clinton was made possible only by manipulating the gold market to keep prices low. The low interest rates which kept the economy on the boil went hand in hand with low gold prices. Investment banks used the low rates to borrow gold from the central banks and sold them short (short selling being the technique of selling assets you don’t actually own in the hope of buying back at a cheaper price because you anticipate a fall in the price). This allowed the banks to make billions from a market rigged to take the risk out of their shorting. And it kept the dollar pumped up. And who was the architect of this strong dollar policy? Why, none other than Robert Rubin of Goldman Sachs — one of the bullion banks most implicated in the gold fixing scenarios.

So, the appearance of another Gold-man at this critical moment is all the proof the gold cartel theorists need that more manipulation is in store to keep the dollar up, gold down, and the bullion banks from losing their . . . er . . .  shorts. (5)

And if this seems conspiratorial, consider what Paul Mylchreest, investment analyst at Cheuvreux, top ranked for its research in Western Europe and part of Credit Agricole, the largest bank in France says today, “Central banks have 10-15,000 tonnes of gold less than their officially reported reserves of 31,000. This gold has been lent to bullion banks and their counterparties and has already been sold for jewellery, etc. Non-gold producers account for most and may be unable to cover shorts without causing a spike in the gold price…” (6)

Or what the Wall Street Journal itself wrote about what took place in the seventies:

Worried the falling dollar was undermining its anti-inflation efforts, the Carter administration announced a multi-part support package on Nov. 1, 1978: The Treasury would use gold sales and foreign borrowing and draw on its reserves with the International Monetary Fund to defend the dollar. At the same time the Federal Reserve raised its discount rate a full point. (7)

And that was in the ’70s, when there was no credible alternative to the dollar, India and China were sleeping giants, Russia was still the Soviet Union, and the United States was not threatening to nuke the Middle East.

How bad is the situation?

[A]s of June 2000, J.P. Morgan reported nearly $30 billion of gold derivatives and Chase Manhattan Corp., although merged with J.P. Morgan, still reported separately in 2000 that it had $35 billion in gold derivatives. Analysts agree that the derivatives have exploded at this bank and that both positions are enormous relative to the capital of the bank and the size of the gold market.

It gets worse. J.P. Morgan’s total derivatives position reportedly now stands at nearly $29 trillion, or three times the U.S. annual gross domestic product. Wall Street insiders speculate that if the gold market were to rise, Morgan Chase could be in serious financial difficulty because of its “short positions” in gold. In other words, if the price of gold were to increase substantially, Morgan Chase and other bullion banks that are highly leveraged in gold would have trouble covering their liabilities. (8)

That was 2000. This is 2006.

So long as gold remains a mere relic . . . a yellow reminder of what used to be money . . . no harm done. Unless something absurd happens, that is. Something absurd like, say, gold doubling to $573 an ounce inside 5 years. If that happened, then the “carry trade” of borrowing gold to invest in paper could become a very expensive way to bankrupt the entire global financial system. (9)

This spring gold hit over $700. And that’s why the hanky-panky is likely to begin in earnest now.

Lila Rajiva is a freelance writer in Baltimore, and the author of the must-read book The Language of Empire: Abu Ghraib and the US Media (Monthly Review Press, 2005) She can be reached at: lrajiva@hotmail.com. Copyright (c) 2006 by Lila Rajiva

NOTES

(1) “Good as Goldman: Bush drafts Hank to bat third,” Daniel Gross, Slate, Tuesday, May 30, 2006.

(2) “Please, Sir, I Want Some More. How Goldman Sachs is carving up its $11 billion money pie,” Duff Mcdonald, New York Metro, Dec 21, 2005.

(3) Speech of Congressman Ron Paul, U.S. House of Representatives, February 14, 2002, www.house.gov/paul

(4) “All That Glitters Is Not Gold,” Kelly Patricia O’Meara, Insight Magazine, March 4, 2000.

(5) According to GATA, the cartel includes J.P. Morgan Chase, Deutsche Bank, Citigroup, Goldman Sachs, Bank for International Settlements (BIS), the U.S. Treasury, and the Federal Reserve

(6) “How Central Banks Have Kept Gold Down,” Adrian Ash, Money Week, February 9, 2006.


(7) “As Dollar Weakens, Hidden Strengths May Stave off Crisis,” Wall Street Journal, January 17 2005.


(8) See Note 4.

(9) See Note 6.