October 17, 2005
Ted Butler
Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it's the only thing that ever has...Margaret Mead
GO GATA!!!
Everything seems to be coming to together; pieces of a financial market puzzle just showed up, some out of nowhere. A number of these pieces have been there all this time, many years, but hidden from the investment world.
One can compare what lies ahead for the gold and silver arena to the Enron fiasco, which was the most highly regarded company in the US; rated so by Forbes and Fortune for five years in a row. It was offered as the model of how a US company should be run.
Perhaps what lies ahead for the financial world will be compared to Refco, which just blew up in a matter of weeks. The fallout from Refco is still unknown. Yet, it is safe to say it is a scandal of substantial proportions.
My guess is the coming gold/silver scandal will also include a comparison to Samsung Electronics:
Oct. 13 (Bloomberg) -- Samsung Electronics Co. agreed to pay $300 million to settle U.S. criminal charges it took part in a global conspiracy to fix the price of digital memory chips used to make personal computers, mobile phones and other electronic devices.
South Korea-based Samsung, the world's largest maker of computer memory chips, and its U.S. unit agreed to plead guilty to conspiracy to fix prices for dynamic random access memory chips and cooperate with a continuing Justice Department investigation, the agency said.
According to court papers filed in earlier cases, victims of the price-fixing cartel included Dell Inc., Hewlett-Packard Co.,
The investigation began in 2002.
-END-
Enron: a hoax, fraud which devastated tens of thousands of people.
Refco: a fraud, whose ramifications are still to be known. They are already much more than insignificant.
Samsung: the words price-fixing, conspiracy, manipulation, and cartel were used over and over again by the Justice Department to describe what were the day-to-day practices of Samsung and their co-conspirators. The US Attorney General handling the case said that in the late 1990‚s "price-fixing schemes were an epidemic" in the US.
Since January 1999 GATA has claimed the manipulation, and artificial suppression of the gold price, was part of this EPIDEMIC.
Ever since GATA‚s Gold Rush 21 in Dawson City on August 8th and 9th, and then Katrina, gold has been trading very differently, as documented in this column over and over again.
That has been very evident the past two trading sessions too, as The Gold Cartel had gold on the ropes, trying to flush out the moving average black box funds. Yet, by the closes gold fought back, only to close down a couple of bucks each day. As all veteran Café members know, gold would have been buried $5 to $10 each trading session in times gone by. A year ago gold was whacked for $18 following a Gold Cartel raid from an overbought technical condition.
CLEARLY something has changed. Gold does not want to go down. As also noted here often, we have seen The Gold Cartel forces cover their shorts faster and faster on each dip.
As a backdrop, the mainstream pundit world is trying to explain the gold price rise. They say it is due to inflation, yet the bond rates are not reflecting surging inflation (as noted by Bridgewater Associates yesterday). They say it is due to the rise in crude oil. However, crude oil just dropped $8 per barrel. Where were these same pundits months ago when oil was taking off above $70 per barrel? No, something else is at play here and GATA thinks we know what it is.
That "it" is nothing new to the Café membership: The Gold Cartel is running out of enough available central bank gold to make their price suppression scheme work like it used to for SO LONG. Surging demand for gold around the world is doing them in. Slowly, slowly, slowly thus far soon to be faster, faster, faster. The perpetrators of the long-standing illegal price-fixing scheme are trapped, short thousands and thousands of tonnes of gold. They cannot cover without sending the price of gold to the moon.
Now, I realize most of you know all of this already. WHY the URGENCY to do a Saturday night MIDAS. Because as events of the past week suggest, the prices of gold and silver are readying to go bonkers. The pieces of the gold/silver puzzle (price manipulation fraud) are coming together at lightning speed.
The Gold Cartel and their silver price manager friends are going to be routed in the weeks/months to come. There is much to get into re why, but first a quick review what silver did on Friday, and a review of MIDAS silver commentary over the past month.
Silver exploded on the close on Friday, leaping 8 cents in the last few minutes, blowing through important resistance. It closed 13 cents higher for the day even though gold closed more than $2 lower. As you will review below, the MIDAS smeller that something BIG was up in silver has been working. Silver is trading unlike anything I have seen for more than a decade.
The late pop on Friday is UNPRECEDENTED for recent years. It suggests one of three options:
*Someone very big is going after silver and getting ready to take the price to the moon.
*Someone very short is desperate to cover those shorts, knows what is coming re a growing derivatives problem, and wanted out on Friday at any price because they know the silver price-rigging scheme is coming to an end.
*Both are true.
One thing for sure, the late move Friday was NO FLUKE! It is extremely significant and we should know why in the days and weeks ahead.
It is a weekend, so let us take the time to examine the pertinent MIDAS silver commentary over the past month:
September 14 - Gold $449.40 up $3.70 - Silver $6.98 up 5 cents
"How Is Everything?" "Everything Is Fine!" Stepford Wives, Result: CRASH!
Some possible very bullish news to bring your way on silver. Silver has been too quiet and acted too mysteriously for far too long. Silver is the one market which is most likely to erupt out of the blue and go ballistic with no apparent reasons showing on the surface. One clue something is up is that a significant buyer of the $10 DEC silver calls emerged. That same buyer sold DEC $7 puts.
September 15 - Gold $454.70 up $5.30 - Silver $7.01 up 3 cents
Gold On Its Way to $1,000, $2,000, $3,000 Per Ounce, Pick A Number
The silver chart is completely different from gold.
December silver
<http://futures.tradingcharts.com/chart/SV/C5>http://futures.tradingcharts.com/chart/SV/C5
*The suppression of the price of silver is out of control. I have seen silver rally $3 in a week. It will do so again, out of nowhere. $10 silver will be here sooner than most think possible.
September 16 - Gold $459 up $4.30 - Silver $7.21 up 20 cents
Gold, Silver And The Shares Roar, Eventual Moon Shot Inevitable
As expected, silver finally took off after putting everyone to sleep. BOOM, she popped 20 cents all of a sudden after a stilted early morning. That is not $3 in a week, but you have to start some place. The gold derivatives situation is more than scary. For sure it has The Gold Cartel petrified. Who knows what the real deal is in silver? But the odds are it could be just as scary, or worse. When the gold derivatives neutron bomb goes off, silver will rally like you cannot believe.
September 23 - Gold $463.10 down $3.40 - Silver $7.25 down 8 cents
Biggest Catastrophe Of All: What PPT/Gold Cartel Doing To US Financial Markets!
This down day in silver will surprise absolutely no one. If a market is not allowed to go up, it will go down. Traders could see that silver was capped on the upside, so locals and other traders pressed the downside.
The net of all of this is silver is doing nothing except preparing for a rocket launch to the upside. It could come at any time.
September 28 - Gold $469.40 up $7 - Silver $7.32 up 7 cents
Gold Explosion To Leave Many Veteran Players/Investors Behind
Silver continues to diddle. Look for it to explode when you least expect it to.
September 29 - Gold $472.10 up $2.70 - Silver $7.48 up 16 cents
Silver In Rocket Ship Mode/Most Important MIDAS Ever
Silver is waking up:
<http://futures.tradingcharts.com/chart/SV/C5>http://futures.tradingcharts.com/chart/SV/C5
Silver led the way today. Yesterday, it left a mini-dime gap. MIDAS thought that was significant because it emphasized buyers were not going to be too cute. They wanted the silver and they wanted it now.
Today it was AIG, known Gold Cartel ally, who was the featured early buyer (800 lots). It was all uptown from there on in.
The Comex floor has turned comfortably bullish on silver. See clear sailing. Last significant resistance is $7.57, basis DEC. Love to see silver gap above that level tomorrow.
The silver open interest rose 1982 contracts to 120,936, as NEW buyers entered the fray, as confirmed in the MIDAS analysis of last night. Today‚s sharp move up in silver suggests (like the reduction in gold open interest), some very big money sees the handwriting on the wall. Gold and silver are going MUCH, MUCH higher!
OK, so why am I jumping up and down re this particular MIDAS? It has to do with the Planet GATA explanation of the markets, especially gold, now reaching the mainstream gold world. Gold has gone straight up since Gold Rush 21, even though the dollar has risen.
This has confused those who tied the gold price almost solely to what the dollar did.
We will never know what sort of impact Gold Rush 21 has had already. Yet another coincidence of gold popping up every time GATA makes a presentation outside the US?
Could be. Yet, I believe it is fair to say it was NO COINCIDENCE that one of President Putin‚s economic advisors traveled all the way to Dawson City to attend our historic gold conference. Not after Oleg V. Mozhaiskov, Deputy Chairman of the Central Bank of Russia, brought GATA to the stunned attention of the bullion dealer world in Moscow June 2, 2004.
October 3 - Gold $465.50 down $3.20 - Silver $7.36 down 6 cents
Consolidation Day Before Gold And Silver Resume Move Higher
Seems to me silver is setting up to roar to the upside.
October 5 - Gold $465.60 up 10 cents - Silver $7.40 up 6 cents
Gold And Silver Set To Move Higher With Hurricane Force
Funny animal silver spent the trading session rejecting lower prices and rallied late to close on the high of the Comex session. Still think silver readying for a substantial move higher. Could come any day now.
The silver chart is more constructive than the gold one. Like Rhody, I smell something is up here. Same sort of smell I mentioned weeks ago. The scent is getting stronger.
October 6 - Gold $471.80 up $6.20 - Silver $7.53 up 13 cents
Hurricane GATA Hits Gold, Silver Markets
Our STALKER source checked in again with more goodies, this time on silver:
*The physical market has tightened up noticeably the past couple of days, following some softness the past couple of weeks. This is the case in London and the States.
*The Saudis looking to LOAD THE BOAT on silver. They want physical, not paper, and are working out how and where to store it in Saudi Arabia, not London.
Glad I do not have a cold. From last night‚s MIDAS:
"Funny animal silver spent the trading session rejecting lower prices and rallied late to close on the high of the Comex session. Still think silver readying for a substantial move higher. Could come any day now.
The silver chart is more constructive than the gold one. Like Rhody, I smell something is up here. Same sort of smell I mentioned weeks ago. The scent is getting stronger."
***
The scent sure is getting stronger. Why, besides what has already been brought to your attention above?
*Deep Throat showed up. What was sent to GATA today was CONFIDENTIAL. I can only get into the basic subject matter, not delve into too many specifics, and not reveal our source. The essence of what was sent to us was the ILLEGAL gold/silver leasing scams are coming to an end. That the authorities are apprised that gold and silver have been leased out in an ILLEGAL manner and that those bullion banks doing the leasing do not have the gold and silver to back it up.
This is all I am able to reveal at this time. Perhaps I will be at liberty to be more explicit in the months or years to come.
The only other remark I can make as to the information GATA received this morning is that most of it is consistent with the GATA information brought to your attention over the past years, especially our invaluable STALKER input.
Then, there is the peculiar, whining comment by the deceitful Silver Users Association this week. It is almost beyond belief, decrying what could happen to the economy should the price of silver go up. What about the people of Mexico, or the economy of Idaho for that matter? The economy be affected because silver moves up a strongly, after years of gloom? How can you compare a long deserved spike in the price of silver (only held down because of blatant manipulation) to the spike in oil? What right does this organization have to urge the SEC to rig the price of silver even more than it has been?
From FreeMarketNews.com:
SUA: BLOCK SILVER PRICE EXPLOSION
Friday, October 14, 2005 - FreeMarketNews.com
The Silver Users Association (SUA) is urging the Securities and Exchange Corporation (SEC) stop Barclays from creating a silver backed Exchange Traded Fund, according to Reuters. In a desperate move to block the ETF, the association made a plea to the SEC that argued that the economy could suffer if silver prices spike.
Barclays filed a registration to create the first silver ETF, however it is still pending regulatory approval. The Silver ETF would be similar to the popular gold ETFs, which are responsible for purchasing about 250 tons of gold worth $3.4 billion. The trust would take delivery of millions of ounces of silver bullion and store it in England. However, some speculators believe that there isn‚t enough silver stored above ground to fulfill investment demand for a silver ETF. If the ETF is blocked for this reason, it could be seen as a bullish confirmation for investors.
The SUA was created in 1947 to lobby for companies that purchase and consume silver. Admitting that supplies are tight, the SUA fears that taking silver from exchange warehouses could be enough to set off a shortage. "We don't endorse a silver ETF because of the potential liquidity problems it would create," the SAU wrote.
The admission by the SUA is astonishing given that all the major players in the silver industry have maintained for a number of years that the silver is plentiful and that the analyses of silver bulls as regards supply were wrong. In admitting that supplies are tight, not only does the SUA vindicate a long-standing argument of the silver bulls it also comes perilously close to an admission that the market has indeed been controlled by those forces which have wanted low, steady prices. By turning to the SEC, the SUA is admitting that the status quo - manipulated as it apparently is - should be continued by any means possible. Unfortunately, a manipulated price is, by definition, a price that must rise somehow, someday. Perhaps, say the silver bulls, that day is now.
-END-
FreeMarketNews is right on and is one more piece in the puzzle that silver is about to blow sky high. The pitiful SUA protesteth too much! The one the SEC should be investigating is the SUA itself.
This admission by the SUA of a severe problem in silver strongly suggests how right GATA has been that silver has been manipulated for many years. Even more so it vindicates silver warrior Ted Butler, who has been in the forefront claiming the silver market has been rigged. He went to the CFTC over and over again. They paid no attention. He went to Eliot Spitzer, who also paid no attention.
Ted Butler:
"...let me give you my description of the Silver Users Association. I‚m not about to beat around the bush. The SUA is a dubious, manipulative organization, whose sole purpose is to artificially depress the price of silver."
"...it is not the intent of the Silver Users Association to urge regular investors to buy real physical silver, but that is the message that comes through, loud and clear. Here‚s why. On any silver price rise, the SUA will be all over the Commodity Futures Trading Commission (CFTC), to pressure the COMEX to curb the "excessive speculation". According to the Silver Users Association, <http://www.silverusersassociation.org/about/objectives.shtml>silver only rises due to "excessive speculation", and never because of legitimate market fundamentals. Where will the SUA‚s attention be focused? At the only place it can be focused ˆ on the paper traders on the COMEXor, more correctly, on the paper traders holding long positions. They are always the culprits. Even though we are at the lowest inflation adjusted price for silver in 5000 years, the SUA will look to assign blame for any price increase on paper silver investors. Trust me - you can take this one to the
-END-
Here's the URL for Ted Butler's essay on the Silver User's Association. It's entitled "<http://www.investmentrarities.com/03-26-01.html>Silver Users - Silver Abusers"
Except for GATA‚s assistance (where we could be, like sending hundreds of letters to Eliot Spitzer not too long ago) and a few others, Ted Butler has been a steadfast and lonely voice spouting the truth out there; fighting the good fight while the silver companies stood silent. They all ought to award him shares in their companies for his valiant decade plus effort.
Another author who has written extensively about the Œpowers that be‚ that control the silver market is Charlie Savoie over at Dave Morgan‚s website <http://www.silver-investor.com/>www.silver-investor.com In his essay entitled "<http://www.silver-investor.com/charlessavoie/raiders.htm>The Silver Raiders" he had this to say about the Silver Users Association"I don‚t know what you could compare them to in any other commodity, because this is the only users group in any commodity. If anyone can show why they are not an illegal short-side price fixing cartel in violation of antitrust law, regular readers of this website would like to see it. That would be like proving the great white shark isn‚t a marine predator."
That‚s it for NOW some of the pieces of the silver puzzle, gold too. If MIDAS is right the price of silver must explode in the weeks to come and gold must follow in the weeks and months ahead. The tension on the shorts must be enormous. On top of the growing awareness of the barrenness of the gold and silver leases by the biggest money (and the US authorities) in the world, the silver/gold crooks have to deal with growing macro tensions in the financial market/derivatives/credit world:
*Delphi
*GM
*Northwest Airlines
*Delta Airlines
*Fannie Mae
*Refco
*(And while not surfaced yet, my guess is GE)
As the financial market turmoil builds in the weeks ahead, the ability of the gold/silver market manipulators to stay with their naked short positions will become intolerable. The likelihood of various derivatives neutron bombs going off has risen dramatically. We should get a silver price explosion followed by a gold one.
What is that saying (Chinese?): "May we live in interesting times."
Chuck checks in on the stock market and the gold shares:
It's Friday after a nasty couple of weeks with terrible A/D action earlier this week. This is the way the stock market works off what it considers to be very oversold. Another gap up, which makes I believe, 4 of 5 days this week. No attempt to try to sell off, a sharp sell off in the VIX demonstrating that concern is wafer thin, and of course, another sharp gap down in the XAU and HUI.
I expect the volume on the lift to dry up, perhaps as early as Monday afternoon, and a resumption of the great bear. If copper breaks down sharply, and the market does likewise, I suspect the rout will be on. This is a decayed market on unbelievably shaky technicals and fundamentals that will give the commentators reasons to explain it. Remember the movie "Carrie" when the doors slam shut and no one could get out. Apply that to this market.
(more from Chuck)
Just a couple of points now that the day is over and I can see some of the technical stuff. First, regarding gold. You know I am always uncomfortable when gold shares gap up which they had been doing. I always prefer when the lemmings panic out not in. You have had two consecutive gap down days and rather sharply at that. That is the type I like to see. I think that most of this is connected to the weakness in commodities recently. We should be ready very soon to go again.
The market today corrected the rise in fear quotient in the VIX and VXN. And the put-call ratio has returned almost to the area it was in when the market started its descent. We might have a little squeeze on Monday and if so, we could go down again. If the S and P is up on the opening (which it is almost invariably on Mondays) you have a low risk put entry. If it opens down, I would wait. We'll see. Chill out and get ready for some real shakings. Chuck
An excerpt from the astute Privateer which supports the GATA camp‚s contention the US is also manipulating the US intermediate/long term interest rate markets, for the obvious reasons:
"To say that rising interest rates are "bad" for Gold is to assume that the fact that the interest rate is rising does NOT reflect any concern over either the borrower of the means of repayment. Unfortunately, in the REAL world, this is NOT the case. Rising interest rates ALWAYS reflect such concerns, and the rate at which they rise reflect the rate at which this concern is growing. Central Banks and Treasuries have evolved very complex manipulative procedures to damp down this concern or, if that proves impossible, to minimize its effect on the interest rate. These procedures can "work" for a while, but they can only do so by making the end result even worse than it would have been had they not been employed."
How the pressure on The Gold Cartel is building and why a Commercial Signal Failure becomes more and more likely by the month:
Hi Bill
I thought of making this chart after talking to a friend of mine about the price of gold as it relates to the COT and the open interest position. Since my friend does not follow the gold market as thoroughly as the GATA gang does, he was having a hard time understanding the relationship between the price of gold re the COT and expanding open interest, and what it all meant.
I showed him this chart and voila everything came together.
Thought it might also help others so here it is.
Thanks for all your hard work.
W Bishop Jordan
Tulip Mania and present day times:
Dear Bill,
After reading your column tonight, I was struck by an image regarding the insanity of the markets. What passes as wisdom today on Wall Street is like something out of an episode of the Twilight Zone. They even had some idiot on bubblevision today, a self-described bull, claiming that a little inflation was a good thing. Since when did inflation become a good thing? Where do they find these people? She really meant it too!
In the same vein, I took my son on a fishing charter in northern Florida today, and the captain described to me the flipping practices going on in the area, as if it were nothing out of the ordinary, and failed to see the absurdity of it all when I applied the voice of reason. Anyway, the image that struck me was a glimpse into the past of the lunacy which surely passed for wisdom during the final days of the Tulip Mania in Holland. I saw the greedy faces of idiots happily paying huge sums of money for tulip bulbs, tossing aside all sound judgement as they became swept up in the mania. Mania are very powerful phenomena, as they are based in mass psychology, not sound economic theory.
What I think we forget around the halls of GATA, the only bastion of sanity in this world, is that we live in the midst of the greatest speculative mania in the history of the world, and that there are forces which seek to delay its demise as long as possible. Holland had no PPT, nor did any other Ponzi scheme, until now.
Yes, it will fail, and if we knew when, we could be among the wealthiest individuals on the planet. Maybe it's next week, or 2 years from now, you can't know. They always last longer than you expect, and come to a very abrupt, unforeseen ending.
Just as I'm sure there were a few prudent individuals ridiculed for refusing to take part in the Tulipmania, gold bugs are ridiculed today. Though we take no pleasure in the fact that we are right in our beliefs, it pains us to see our fellow men and our entire culture behave as if the emperor were clothed in robes of gold and silver.
Here's hoping for a more sane world next week...
Peter
There is no telling what sort of volcanic silver and gold price commotion we will see in the precious metals markets over the weeks and months ahead. My bet is the coming seismic activity will result in spectacular moves to the upside.
GATA BE IN IT TO WIN IT!
MIDAS
Appendix
Hi,
I spent most of my life as an intelligence analyst working for the US Navy and National Security Agency. I loved my job and was quite successful. Now a retired gold/silver investor, I have spent the last year applying my analytic skills trying to figure out what in the hell was going on with the world economy, world political situation and, in particular, the Bush Administration.
There is no doubt in my mind that there is a movement which has existed for years to reform the world into three political and economic zones which would be subordinate to a world government structure - the New World Order or as Jim Sinclair calls it "Authoritarian Free Enterprise". Europe, North/South America and Asia governments have, for years, been taking steps towards economic, military, security and political agreements in preparation for the "New World Order". There has been so much evidence of this movement, particularly since the end of the cold war, that to deny the "conspiracy" is to admit extreme ignorance. The general public throughout the world are willing and eager to stay ignorant in these matters and the government controlled media has done it's job of cover up and propaganda extremely well.
As one would imagine, there have been and will be a great many problems during the organization and implementation of the New World structure. Wars, regime changes, and implementing de-nationalization amongst participating entities have and will be filled with problems of immense proportions to the "elitists" involved in this massive, revolutionary scheme. It is my opinion that the movement will almost certainly die a silent death long before it's existence ever becomes public knowledge.
I believe an early and major battle is now taking place in regards to that movement right now. It is very obvious to me that key personnel of both parties, and all branches of Federal Government have been involved in the movement. From an economic standpoint, absolutely key to the transition would be timing of an orchestrated world economic collapse (very near) and global catastrophe (bird flu?) precede the integration of new political and military structures to "save" the apocalyptic situation the world's population would find itself in.
As we would expect, at some point powerful non-players in the New World Order would become aware and rebel. It is my professional opinion that the Federal Reserve is no longer a player. Why not, I do not know. Perhaps Bush is equally repulsive to Greenspan as both are to me.
At any rate, Greenspan's speech a couple of weeks ago when he gave a short lecture on the historic failure of government control over markets and economies such as the Soviet Union kicked off a sequence of events that are unfolding as we speak. I believe that speech was directed towards the Bush Administration and many others involved in the New World Order and laid the foundation of an inspired counter move against the Elitists. I believe the Fed Reserve, SEC, Elliott Spitzer and others are currently making that move in hopes to defeat or gain concessions from the New World Order Elitists.
Over the last two weeks, never before have so many Central Bank governors given so many public speeches to promote the "fear of inflation" and higher interest rates. Of course, even my dog is fully aware that inflation has been running wild for years, but obviously the investing public had to be primed by Greenspan for his planned moves (look for at least 1/2% rate hike at or before the next Fed meeting).
This week's unveiling of Refco's derivatives scandal is stunning. All gold bugs and my dog are fully aware that "someone/something" has been controlling stock, Forex and commodity markets for years and recent the frequency and degree of control has increased dramatically (post London Terror attacks, pre and post Katrina, pre and post Rita, etc.). I am convinced that while Snow and most of the key Treasury Dept boys were away (CHINA), the opposing force (Fed Reserve, SEC, Elliott Spitzer, etc) made their move. It is very apparent that the move on Refco was planned for sometime and extremely quick and the fallout very well contained. If I am right, either the two sides go public and the truth behind years of New World Order planning and market manipulation is revealed, OR an agreement is reached between the two parties. Either way, we will not see life as usual in the days to come. As we say in the Navy, stand by for heavy rolls!!!!!
Regards, Chuck
GATA‚s Ed Steer comments on what Chuck has to say:
Hi Bill,
Yep, excellent and truthful commentary...and I couldn't agree more...right down to the bird flu epidemic.
Except for the bird flu, everything he talks about is contained in my essay "Twilight's Last Gleaming."
Ed
The latest on Refco:
By Adrian Cox and Ann Saphir
Bloomberg News Service
Saturday, October 15, 2005
U.S. regulators including the Commodity Futures Trading Commission are stepping in to help prevent a collapse at Refco Inc., the largest independent U.S. futures broker, over concerns it would destabilize markets.
The CFTC was approached by brokers offering to guarantee Refco's positions, Commissioner Sharon Brown-Hruska said in an interview yesterday. Goldman Sachs Group Inc. also held talks with regulators in its role as Refco's financial adviser, two people familiar with the negotiations said. Goldman ruled out using its capital to bail out or buy Refco, said the people, who asked not to be identified because the talks are confidential.
Refco's business has been unraveling since the company disclosed Oct. 10 that former Chief Executive Officer Phillip R. Bennett covered up $430 million in bad debts. Regulators initially wanted Refco to work its own solution. As the crisis deepened and threatened to snowball, they moved in.
"It's a market liquidity issue," Brown-Hruska said. "Firms are somewhat linked together."
Refco is the largest provider of customer-transaction volume to the Chicago Mercantile Exchange, itself the biggest U.S. derivatives exchange. The New York-based company processed 654 million derivative contracts for the fiscal year ended February 28, 2005, more than the numbers traded on the Chicago Board of Trade, the Chicago Board Options Exchange, or the New York Mercantile Exchange during the same period.
Trading in at global futures markets rose 31 percent in 2004 to $1,144 trillion, according to the Bank for International Settlements.
The nature of Refco's business puts other brokers and investors at risk of getting hurt should the company become insolvent. As counterparty, Refco is either on the buying or selling side of a trade. If Refco runs out of cash to honor its side of the bargain, the other party doesn't get paid.
Refco also maintains accounts for trading clients and lends them money to make leveraged bets. If Refco runs short of cash as its business deteriorates, it may not be able to make requests to withdraw from those accounts.
Market regulators are getting involved "to stop some fears of a cascade effect a bankruptcy will trigger," Michael Greenberger, a former director of trading and markets for the CFTC who's now a law professor at the University of Maryland. "There is every sign here that this is a systemic problem and Refco is one of the dots that needs to be connected."
The discussions with New York-based Goldman, the world's third-largest securities firm, covered options for Refco including a bankruptcy filing, accelerating the settlement of some contracts, and prolonging a freeze on the company's assets, according to one of the people familiar.
Goldman also helped underwrite Refco's $583 million initial public offering in August. Goldman decided against being part of a potential bailout of buying Refco outright because it wants to avoid a conflict of interest and is concerned about risks, both the people familiar said.
The CFTC didn't ask any firms to rescue Refco, said Alan Sobba, a spokesman for the Washington-based agency.
"We didn't do that, nor would we do that, because that's not our role," Sobba said. "CFTC is monitoring developments involving Refco, and our primary interest is the protection of customer funds and the integrity of the futures market."
On Oct. 13, Refco placed a 15-day moratorium on all business at its Refco Capital Markets Ltd. and hired Goldman Sachs. Yesterday, Refco Securities LLC, the company's biggest unit, "initiated the process of unwinding proprietary and client positions" and won't seek new business.
Standard & Poor's cut Refco's credit rating for the third time in four days and said "a payment default is highly likely." The U.S. Securities and Exchange Commission barred Refco's owners from withdrawing equity capital for 20 days. Refco's bonds plummeted. The company's 9 percent notes due 2012, was the most actively traded bond yesterday, dropping 9.5 cents on the dollar to 30.5 cents, according to Trace, the bond- price reporting system of the NASD. That drove up the yield to 38 percent, meaning investors are betting Refco is a riskier bet than Delphi Corp., the auto-parts maker that filed for bankruptcy on Oct. 8.
At the New York Stock Exchange, Refco's shares remain halted at $7.90, 64 percent lower than their IPO price of $22 just three months ago. Thomas H. Lee Partners LP, the Boston- based buyout fund that bought its shares at $8 when Refco was still a closely held company, is sitting on a 40 percent stake.
A coordinated probe of Refco by the SEC, the U.S. attorney's, office and the CFTC expanded late last week. Investigators who initially were focusing on the bad debts they believe Bennett, 57, was hiding now are trying to determine if there was more misconduct or potential fraud at the company.
Bennett, a U.K. native who joined Refco in 1981 and became CEO in 1998, was arrested Oct. 12. U.S. Attorney Michael Garcia accused him of keeping $430 million in uncollectible debts hidden from lawyers and auditors by using a series of matching loans between Refco, his own holding company, and a customer.
The customer, Liberty Corner Capital Strategy LLC, a Summit, New Jersey-based hedge fund, was unaware of Bennett's scheme, according to its lawyer, Kevin Marino.
Refco officials including Peter McCarthy, president of Refco Securities LLC, Refco Inc.'s CEO William M. Sexton and spokesman Rob Solomon didn't return calls seeking comment. Bennett and his lawyer, Jack Weinberg of Herrick, Feinstein LLP in New York, didn't return messages.
-END-
Regulator limits trading at Refco as broker shuts securities arm
Jill Treanor
Saturday October 15, 2005
<http://www.guardian.co.uk/>The Guardian
US regulators last night took action against Refco, one of the world's largest derivatives brokers, as the repercussions of its chief executive being charged with fraud continued to reverberate across Wall Street.
In a step that reflected the severity of the situation, the securities and exchange commission placed trading restrictions on the business, limiting Refco Securities and Refco Clearing from making transactions over a certain size for 20 business days.
Refco said it was pulling down the shutters on its securities arm - which makes 50% of its revenues - in an attempt to conduct an orderly unwinding of multi-million dollar positions.
In less than a week the brokerage firm has been transformed from being one of Wall Street's most successful firms to one fighting for survival after its chief executive, Phillip Bennett, was charged with defrauding investors by using a hedge fund to hide $430m (£250m) of debts.
The move to close the securities business followed the decision on Thursday to stop its capital markets subsidiary trading for 15 days in an attempt to stop clients clambering to leave. The brokerage said its Refco Securities arm would only conduct transactions that were necessary to help it close out its positions. "Refco is initiating this step to facilitate an orderly wind-down of positions," the company said.
The SEC said it had concluded that any business "may be detrimental to the financial integrity of the broker-dealer or unduly jeopardise the broker-dealer's ability to repay customer claims or other liabilities which may cause a significant impact on the markets or expose customers or creditors to loss".
The attempt to prevent Refco collapsing under a rush of customers trying to remove their cash from the business came even though the company said it was not in breach of its regulatory capital requirements.
It was not clear last night whether Refco, which only floated on the New York stock market two months ago, would survive. An analyst at ratings agency Standard & Poor's told Reuters: "The customers and counterparties have apparently lost confidence in the credit worthiness of the company." S&P has already cut its long-term counterparty rating to six levels below investment grade.
While Refco was fighting for its future, investors who bought shares at the time of the share offering have begun legal actions. The bankers to Refco were reported to be planning to meet to discuss their loans to the business - $800m through bank debt and $600m through bonds - which are technically in default since its announcement on Monday that financial statements back to 2002 can no longer be relied on.
In the City, where Refco has a major business that is active on the Liffe derivatives market, executives refused to take calls. However, Liffe said the business was trading as normal although it was monitoring the situation in the US.
END
WATCH AIG!!!
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</magazine>CFO Magazine
The abuse of finite insurance uncovered at AIG and other insurers may be just the tip of the iceberg.
</index.cfm/l_emailauthor/4007501/c_4028838/2985003>Ronald Fink, CFO Magazine
June 01, 2005
Infinite Risk?
The abuse of finite insurance uncovered at AIG and other insurers may be just the tip of the iceberg.
What do many corporate buyers of insurance have in common with American International Group? Perhaps more than they would like to admit. Like AIG, many companies in the past few years have bought finite insurance, which transfers a prescribed amount of risk for a particular liability. What regulators now want to know is, how many companies, like AIG, have used finite insurance to artificially inflate their financial results?
It's a tough question to answer, since there's nowhere near enough disclosure in corporate financial statements to determine whether buyers are properly accounting for such contracts. Consider the case of Delta Air Lines. Several years ago, when the financially troubled carrier wanted to remove from its balance sheet at least part of its growing liability for free mileage grants to frequent fliers, Delta used its captive insurance subsidiary, Aero Assurance, to buy reinsurance for the purpose. (Reinsurance was necessary because a captive's results are otherwise consolidated on a parent's balance sheet.)
The deal enabled Delta to take "a very large liability" off its balance sheet, the company's risk director at the time, Chris Duncan, told CFO in an interview for the March 2001 online article "<http://www.cfo.com/article.cfm/2992209>Delta's Strategy for Reducing Turbulence." But Duncan would not go into further detail, and nothing about the transaction was disclosed in Delta's 10-K. Indeed, Delta has said very little about the deal. Duncan has since left Delta to join insurance brokerage giant Marsh Inc., a division of Marsh & McLennan, and did not respond to a request for comment. Delta also failed to respond to such a request. But experts say a frequent-flier program is the type of liability that lends itself to finite coverage.
Loans in Drag
Delta, of course, is hardly alone in using insurance in this way. Indeed, there's nothing legally wrong with doing so. The trouble is, regulators suspect that much of the activity in this arena is really financing masquerading as insurance, because it involves little or no transfer of risk. Without more significant risk transfer, the accounting rules say there should be no change in the liabilities recorded on a buyer's balance sheet.
Given the general lack of disclosure, it is impossible to say how far the abuse goes. But AIG has been on the other end of similar deals with PNC Bank and with a Plainfield, Indiana-based cell-phone distributor named Brightpoint. In settling charges of aiding and abetting accounting fraud in the PNC case in late 2004, AIG acceded to a Securities and Exchange Commission demand that it install an independent monitor to oversee its operations. Reportedly, the monitor is not only supervising new AIG deals, but also investigating others that the company engaged in around the same time.
Meanwhile, the SEC and other authorities, including New York State Attorney General Eliot Spitzer, the National Association of Insurance Commissioners, the Financial Accounting Standards Board, and the Federal Bureau of Investigation are hunting for problems elsewhere. General Electric, which like AIG both sells and buys finite insurance, is the latest company to be subpoenaed by the SEC in connection with the product. As Scott Taub, the SEC's deputy chief accountant, told a conference on financial reporting at Baruch College in early May: "Finite insurance is not solely an insurance company issue. It affects buyers as well as sellers. Any number of companies have this issue." The potential upshot for CFOs of offending companies: a new round of SEC enforcement actions, followed inevitably by shareholder lawsuits.
In the most worrisome cases, premiums for finite insurance fully cover the discounted value of all potential losses, and any unclaimed money at the end of the contract is returned to the buyer. All too often, say critics, the only cost to the buyer is the interest earned by the seller on the money, an arrangement unmistakably a loan rather than insurance.
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