In Ted Butler's Archive

Regulators Who Won’t Regulate

(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

One of the most disturbing aspects of the current financial crisis is not just white-collar crime, but the lack of a cohesive reaction to it by law-enforcement and regulatory authorities. It was the lack of oversight and common sense regulation that permitted the crooks on Wall Street and elsewhere to create the epidemic of fraud impacting us all.

As bad as the lack of justice for past misdeeds is to the public psyche, there is something even worse: regulators ignoring an obvious crime in progress. Especially when the evidence of that crime is readily available and published by the regulator itself. Yes, I’m back to the ongoing silver manipulation and the evidence of that crime being issued by the primary market regulator, the CFTC.

The new weekly Commitment of Traders Report (COT) and the monthly Bank Participation Report (BPR) for March have been released, for positions as of March 3. There were some stunning new manipulative milestones recorded in both reports, in terms of concentration by the big short(s). Since there was a sharp sell-off in price for the week ending March 3, I was expecting the big shorts to have reduced their short position. That’s what they normally do. That they actually added to their short position was a shock to me. Clearly, their selling caused prices to drop. This is Manipulation 101.

In the COT, the reported net percent of the market held by the four largest shorts rose to the highest level (51.7%) since 2002. In “true-net” terms, with all spreads removed (as discussed last week), the big 4 were still over 70% short the entire market. The CFTC is on their third silver investigation within five years, while at the same time reporting that the short concentration has grown to the highest level in that time. This is akin to tripping over and not seeing the dead body in a murder investigation.

The March BPR recorded the largest percent (33%) of the market held short by one or two U.S. banks in silver ever. To my knowledge, this also may be the largest percent held by U.S. banks in any major market, long or short, ever. Please remember, this percent of the markets held by one or two U.S. banks is before removing spreads, and thus understates the true net percentage, which is more than 45%. The reported short position is equal to 154,190,000 oz of silver, or 23% of total annual world mine production.

The most disturbing aspect of the data just released is that almost all the short selling in COMEX silver over the past two months has come from the big short(s). From January 6, when silver closed around $11.10, to March 3, when silver closed around $12.85, the net increase in the total commercial short position was 7784 contracts. Of those 7784 net new contracts sold short, the big 4 accounted for 7490 contracts, or 96.2%. Of the 7490 contracts sold short by the big 4, the one or two U.S. banks accounted for 6149 contracts, or 82%.

The message of these data should be clear. The vast majority of the additional short selling over the past two months was concentrated new short selling by those already holding a large concentrated short position. The most plausible explanation for this new selling was to cap the price and limit damage caused by rising prices to an already existing large short position. This is manipulation, pure and simple. If the price of silver were at a fair and free level, there would be many different participants competing to sell contracts, not just one to four. As it stands, there are very many traders buying and looking to buy, while the sell side is populated primarily by one big U.S. bank.

As I write this article, the big short(s) is attempting to rig the silver and gold markets lower to trip off technical fund selling below the 50 day moving averages. Will that attempt succeed? I don’t know. What I do know is that this is market rigging of the highest order. I also know that the big short is becoming increasingly isolated and more learn of the manipulation daily. That’s good for us, bad for them.

How did we get to the point where a big U.S. bank, most likely JP Morgan Chase, has come to manipulate the silver (and gold) market? Why are U.S. banks allowed to speculate in commodity markets at all, when they have caused such havoc already with their failed trading in just about everything they touched? Didn’t they do enough damage with subprime mortgages and credit default swaps? Why should taxpayers subsidize bank commodity speculation and manipulation? When did the regulators stop enforcing the law and switch over to defending the criminal element?

The answers to those questions are contained in observing the news flow, government data, and correspondence from the CFTC to various congressmen and senators in response to those readers who have written to their representatives. I thank all who have done so and urge those who have not yet contacted the regulators and your elected officials to do so, as it really makes a difference. A clear picture is emerging. Allow me to present the findings to date, as I understand them.

In the case of silver, while the manipulation has been ongoing for many years, the criminality kicked into high gear when JP Morgan took over Bear Stearns, at the government’s request, last March. Bear Stearns was the holder of the large concentrated short silver position and it was inherited by Morgan. In JP Morgan’s defense, it does not appear they initiated the concentrated silver short position. It was excess baggage from the forced takeover of Bear. The Treasury Department and Federal Reserve backstopped Morgan and agreed to hold them harmless for financial losses and for criminal involvement in the silver manipulation. The financial system was weak enough at the time of Bear Stearns’ failure, that a blowup in silver had to be avoided. JP Morgan was given the go-ahead to “manage” and control Bear Stearns’ silver short position directly by the Treasury.

While it is understandable that JP Morgan would accept the Treasury Department’s request, and that the avoidance of a potential financial panic is always a good thing, panics are short-term events. A year has now passed, and the manipulation is still in force, stronger than ever. What started as a temporary remedy for a short-term emergency, has evolved into a continuance of the long-term silver manipulation. This is wrong on every level. The U.S. is a nation governed by the rule of law. No one is above the law. Not the Treasury Department, not JP Morgan, not the CFTC. If my findings are accurate, then the passage of time indicates that there is potential real criminality here.

As far as the CFTC, it is a weak agency, incapable of over-ruling a directive from the Treasury Department. They had no choice but to allow the silver market to continue to be manipulated by allowing the transfer of the concentrated short position from Bear Stearns to JP Morgan. Besides, the CFTC already dropped the ball by allowing the concentrated short position to come into existence at Bear Stearns in the first place and denying for years that the silver manipulation existed. They had no choice but to go along. They couldn’t stand up to Treasury if they wanted to.

So how does this end, or can JP Morgan, Treasury and the CFTC allow this crime to continue indefinitely? No one has a lock on the future, but there is no easy way out for them. This cannot be resolved quietly or orderly, but it must and will be resolved. Even if the manipulators don’t blink first, the growing shortages in the wholesale physical market will bring this scam to a head. That’s why you must own silver. But there is more you can do.

I ask you, once again, to contact the regulators and your elected officials. You will not regret it. There is no legitimate answer to why are banks allowed to speculate in commodities? With taxpayer money, to boot. Soon, a new chairman, Gary Gensler, will be confirmed by the Senate to lead the CFTC. When that occurs, I will ask you to contact him in this matter. In the interim, because of the Treasury Department’s possible criminal involvement, I am including a link to their Inspector General’s hotline. I have already contacted them. So should you. The IG for Treasury is Eric Thorson. Please feel free to send a link to this article.

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