Tuesday, December 20, 2011

The Manipulation Behind the Markets: Who Pulls the Strings?

Great fortunes can be made by manipulating global markets. And if you can tip the markets far enough, you may even be able to bring down governments. Here is the story of a market manipulation that may have helped trigger the great 2008 global markets crash:
... a group of scientists has released a study that shows a critical piece of the puzzle went missing, and that piece continues to go ignored, to everyone’s peril, including the banks.

...Their new study shows that banks themselves were under attack by other players on Wall Street. The study authors at the New England Complex Systems Institute (NECSI) retraced events to show that at a critical point in the financial crisis, the stock of Citigroup was attacked by traders by selling borrowed stock (short-selling) which may have caused others to sell in panic. The subsequent price drop enabled the attackers to buy the stock back at a much lower price.
This kind of illegal market manipulation is called a bear raid and the new study supports earlier suspicions that the raids played a role in the market crash.

The study has direct evidence. Through its analysis of stock market data not generally available to the public, namely the borrowing of shares, NECSI reconstructs the chain of events.
On November 1, 2007, the number of borrowed Citigroup shares jumped by 100 million shares, a value of almost $6 billion. Six days later, a similar number of shares was returned on a single day.

Shares are generally borrowed to sell on the market. The trading on November 1 was almost four times the usual volume. The newly borrowed shares represented over three-quarters of the volume on that day. When a large volume of shares is sold it can drive prices down. The price of shares that day dropped by almost 7 percent. By the time the shares were returned, it had dropped nearly 20 percent.

Professor Yaneer Bar-Yam, President of NECSI, maintains this was no "freak" or coincidental event. "When 100 million shares are borrowed on a single day and then returned on a single day, the evidence that this is a concerted action is hard to refute. The likelihood of such an event happening by coincidence is one in a trillion."

The NECSI scholars are also voicing concern about how the incident was allowed to happen. Selling shares to deliberately cause a price drop to induce others to buy or sell is illegal, but enforcing the law after it is violated is much less effective than preventing it from happening in the first place, they maintain.

"There used to be a rule that prevented it from happening by forbidding borrowed shares from being sold in large blocks that drive the price down," said Bar-Yam. "The Securities and Exchange Commission repealed that rule, known as the price test or uptick rule, on July 6, 2007."

Last year, the authors of the report sent preliminary results of their study to the financial services committee of Congress, and Congressmen Barney Frank and Ed Perlmutter sent it to the SEC.

Unfortunately, Professor Bar-Yam says that he hasn’t seen any action by the SEC to identify or prosecute those responsible or to prevent its occurring in the future. _Physorg
Of course, the affirmative action banking rules put into place by Presidents Carter and Clinton -- and reinforced by assorted members of Congress such as Dodd, Frank, Waters, etc -- did not help to calm the instability that was building in the markets.

Certainly the SEC dropped the ball, as did the ratings agencies, and the due diligence mechanisms of financial institutions themselves -- which should have known to fight back against destructive government rules rather than to be complicit in their own quasi-suicide. Or perhaps they knew they would be bailed out, no matter what dysfunctional government regulations forced them to do?

The episode related above was likely just one of many -- one that was particularly clumsily done, and easiest to detect. Certainly the Russians had made threats against the US economy sometime before the crash. Wealthy currency traders / manipulators such as George Soros are always looking for an inside play, and have hands in many pockets, and on many strings.

The larger the government bureaucracy, the more difficult it is to clean it out when it becomes corrupted and infested by assorted rats, spies, and the cats' paws of assorted power players.

The unsightly and unstable towers of governance in the US and Europe have grown so large and off-balance, that less and less pressure will be required to send them tumbling. The problem was predicted and predictable many decades ago -- even farther. But they will not listen. They never listen.

You should begin making preparations, should the worst occur.

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