Where Is Goldman Now Making It’s Big Profits? Why, by Stealing from our Pension Funds!

Have you watched what the markets have been doing recently? I don’t mean the usual basket of stocks that make up the Dow Jones Industrial Average, which contain corporations that can permanently lose profitability – or even go bankrupt – (remember that previous components of the Dow included Sears, Kodak, AIG, GM, and Citigroup). Rather, I mean the big mining companies and productive oil-field trusts which, though they may be less profitable during a global recession, still own stuff in the ground that the world’s developed nations will ultimately need. And these outfits have the means of extracting their mineral wealth on demand. There is no conceivable way such resource-rich companies could ever go bankrupt.

Let’s consider a few. Gold is being used in jewelry and electronics as fast or faster than it is brought out of the ground – and is also widely used as a source of wealth immune to currency crashes. One of the best gold mining stocks is Gold Corp (symbol GG). Then there are the Royal Canadian Oil Trusts, which pay their stock holders a percentage of the value of the oil they pump out of the ground each month. An example is Penn West Energy Trust (NYSE: PWE) currently paying at an annual rate of 13%. And then there is bauxite. According to an article in the August 2008 American Ceramic Society Bulletin, demand (at that time) was greatly outstripping supply. The same article mentioned that “China ... has become the world’s largest smelter of aluminum, responsible for nearly one-third of the world’s production.” The Aluminum Company of China (NYSE: ACH) is reported to be buying up and hoarding bauxite. And last but not least, there is Brazil's Companhia Vale Do Rio Doce (NYSE: VALE.P), which “...produces iron ore and iron ore pellets, nickel, manganese ore, ferroalloys, and kaolin ...bauxite, alumina, aluminum, copper, metallurgical and thermal coal, metallurgical coke and methanol, cobalt, potash, and other non-ferrous minerals, as well as precious metals, including platinum-group metals, gold, and silver. In addition, the company operates logistics systems in Brazil, including railroads, maritime terminals, and a port.” The stock prices of all of these outfits suffered greatly during the so-called “bursting of the commodities bubble,” which hit ACH in October 2007 and struck the rest around June 2008.

So why is Goldman Sachs the big winner of late? Well, in today’s column Paul Krugman has this to say:

Goldman’s role in the financialization of America was similar to that of other players, except for one thing: Goldman didn’t believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages — then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers.

And Wall Streeters have every incentive to keep playing that kind of game.

Krugman does not speculate as to just what “kind of game” Goldman is playing now. But I believe that I have the answer. Goldman, and probably every other investment banking company, has been operating hedge funds which garner minute-to-minute gains by rapid computer buying and selling. They make assured profits by either having advanced information as to which direction the markets are going to move in a given time interval, or by using computer programs capable of finding historical patterns which support high-probability guesses based on precursor events.

Either way, I believe the core of “the game” to be government manipulation of the markets. I am not alone in this belief. However, I believe that I have deduced the fundamentals of this game, namely, massive naked short-selling of commodities when bad economic news causes the Dow and other major indices to begin “heading south.” Using money taken in by these short sales, they buy baskets of the Dow, S&P, NASDAQ Composite, etc., thus propping them up again, giving us little guys confidence that no crash is in the offing.

Where’s my proof? Well, I believe you should be able to figure it out yourself by studying the graphs above. Clue: Traditionally, when the markets seem about to collapse, the investor flees to commodities. Now the exact opposite is happening.

Apropos, you might want download an essay I wrote on this back in August of 2007 – at the very time when “full court press” market manipulation first began ...wiping out a half-year’s profits of the big hedge funds whose “quant” computer programs had up to then presumed the markets to work as normally expected.

So, in summary, Goldman and their ilk are back to making big money by stealing from our pension funds!

Post Script 1: I based this article on original research that involved graphing the markets (as illustrated at the top) and simply guessed Goldman Sachs' likely role in the market manipulation that I inferred was going on. I had somehow missed the story a week before about the former Goldman executive that was accused of stealing Goldman's market-manipulating computer codes. Then a week later the New York Times came out with a front-page article on the high-speed codes that a few market participants are using to gain a significant advantage over the rest of us, including the managers of the mutual funds that may be part of our 401 K and/or IRA pension/retirement monies.
BTW The graphs I show above were easily created on Google Finance. Try it!
Post Script 2: In his 3 August 2009 column, Paul Krugman mentions high-frequency trading and notes that this is "one reason Goldman is earning record profits and likely to pay record bonuses." He concludes with this remark:
"Neither the administration, nor our political system in general, is ready to face up to the fact that we’ve become a society in which the big bucks go to bad actors, a society that lavishly rewards those who make us poorer."

Credit Default Swaps: The “Gordian Knot” Standing in the Way of Economic Recovery

Photo credit: Daylife

Why Is the U.S. Govt. Inclined to Pay 250 Billion Taxpayer Dollars to Prevent A.I.G. from Going Under?

Answer: To Keep European Banks Solvent!

In an article by Joe Nocera entitled “Propping Up a House of Cards” appearing in the print edition of the New York Times on February 28, 2009 (and his “Talking Business” column in the web edition), we learn that “credit default swaps” are the root problem. Here are a few noteworthy passages:

“Next week, perhaps as early as Monday, the American International Group is going to report the largest quarterly loss in history. Rumors suggest it will be around $60 billion, which will affirm, yet again, A.I.G.’s sorry status as the most crippled of all the nation’s wounded financial institutions.”

“So far the government has thrown $150 billion at the company, in loans, investments and equity injections, to keep it afloat.”

“A.I.G. effectively has been nationalized, with the government owning a hair under 80 percent of the stock. Not that it’s worth very much; A.I.G. shares closed Friday at 42 cents.”

“[It has been predicted] that A.I.G. is going to cost taxpayers at least $100 billion more before it finally stabilizes.”

“If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks ‘will face their own capital and liquidity crisis, and we could have a domino effect.’ A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system [emphasis added].”

“More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.”

Practices? What practices? Well…

“[M]ost of A.I.G. operated the way it always had, like a normal, regulated insurance company. But one division, its ‘financial practices’ unit in London, was filled with go-go financial wizards who devised new and clever ways of taking advantage of Wall Street’s insatiable appetite for mortgage-backed securities. Unlike many of the Wall Street investment banks, A.I.G. didn’t specialize in pooling subprime mortgages into securities. Instead, it sold credit-default swaps [link provided by NYTimes].”

Credit default swaps (CDSs) is a terminology that is not yet widely seen in the mainstream media. And from the speeches I’ve listened to, CDSs don’t seem to have been mentioned by president Obama either. Does this mean that CDSs are unimportant?

Au contraire, CDSs are at the root of why the present economic crisis cannot be solved solely by means of “bailouts” or “stimulus plans.” How do I know? Because I’ve read some authoritative articles on the subject [for example here, here, and here] well before the NYTimes put up Joe Nocera’s link above. And one of the things I’ve learned is that the notional value of all known CDSs is now in excess of $ 500 trillion (half a quadrillion dollars!) – or about 10 times the value of all the world’s stock and bond markets combined! These debts literally can NOT be paid, at least not without debasing most of the world’s currencies by factors of one tenth to one hundredth of their present values.

How can this possible? Well, it’s because the market for derivatives (famously termed by Warren Buffet “financial weapons of mass destruction”) has operated over-the-counter – totally unregulated – for the past decade. Eventually, hedge funds placed binding “bets” that the real-estate bubble would never stop inflating. These bets took the form of CDSs, which are essentially insurance policies on the by-now-well-known collateralized debt obligations (CDOs). (Reminder: CDOs are sliced and diced bundles of largely-toxic, largely real estate debt instruments.)

Now that the real-estate bubble has burst, the present owners of those CDSs are demanding to be paid their due – which, to repeat, adds up to about 10 times what the world’s stock and bond markets were worth before the beginning of the present market slide! To actually pay off all of this “debt” would mean creating a small number of trillionaires at the expense of wiping out the entire world’s financial system, and the world’s middle class along with it!

So is there no way out? Well, no one else has publicly proposed one yet, so let me take a crack at it. I suggest that all of the developed countries of the world whose banks – and whose insurance companies like A.I.G. – are facing CDS-derived losses far exceeding their net worths should summarily nationalize all such at-risk banks and insurance companies. Then all of these countries (especially the U.S.!) should promptly declare NATIONAL bankruptcy. Whereupon, bankruptcy courts would negotiate payments to all current holders of the CDSs, likely amounting to just a few cents on the dollar. Once this is process is completed, these countries would be free to restart their economies the old fashioned way: Commercial banks would accept deposits in return for interest payments and would use these deposits to make properly collateralized loans to responsible individuals and businesses. Investment banks may rise again, but not without the kind of government regulations that might have saved us from the present crisis…

Update 3/22/09. Highly recommended: Today's Frank Rich column in the NY Times.

You might also be interested in the extensive discussion elicited by this very same column when I published it on OpEdNews (where it was headlined!). Be sure to scroll down until you see the first comment, read them in order; all are instructive but the last one.

The Real Story of Precious Metal Manipulation by Investment Banks ...with Government Collusion

The Real Story
By: Theodore Butler

There is compelling new proof of a silver (and gold) price manipulation. The evidence connects the investment bank JP Morgan Chase, the dominant force in world commodity trading, the U.S. Commodity Futures Trading Commission (CFTC), the primary commodity regulator, and the U.S. Treasury Department, the arranger of every conceivable...

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