In Ted Butler's Archive

Beyond Taxation Without Representation

(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.)

The words go to the essence of what is just and unjust. Of what is acceptable and unacceptable. The slogan, “no taxation without representation” was the rallying cry that led to America’s war for independence from Great Britain. Its spirit was behind the Boston Tea Party and the list of grievances in the Declaration of Independence. It is just plain wrong to tax citizens in a democracy and disregard their collective will.

Of course, some things are very different today than at the time of the founding of our country. For starters, there are a hundred times more people in the U.S. than in 1776. That does tend to complicate matters, although it also presses the case for sticking to bedrock principles. Sadly, it has become all too common over the past 230 years to witness government bureaucracies being unresponsive to the needs of those funding these government agencies.

If you think I am complaining that the taxpayer-funded Commodity Futures Trading Commission (CFTC) is ignoring the collective will of those that fund its activities you would be only partially correct. Yes, it is true that the CFTC, in its handling of continuing allegations of manipulation in COMEX silver and gold, is ignoring the wishes of those who support the agency through taxes. But this goes way beyond the waste of taxpayer funds and the disregard of the mandate of the people.

I invoke the image and principles of our country’s founding to demonstrate that the CFTC is doing something much worse than not representing the constituents who fund it. It is violating the law. There is a world of difference between a bungling bureaucracy being incapable of fulfilling its mandate and its intentional violation of the very laws for which it was created. The CFTC has clearly crossed the line between incompetence and illegality.

The CFTC was created by Congress in 1974, to prevent fraud, abuse and manipulation in the futures markets. Its mission is to promote market integrity and to protect the public. Instead, the agency has morphed into a closed club of cronyism which places industry special interests above integrity and public protection. Nowhere is this more evident than in the Commission’s handling of repeated allegations of manipulation in the silver market. Simply put, the CFTC has done everything in its power not to uphold commodity law, as it applies to silver (and gold).

Specifically, the Commission has refused to apply its own standard for what constitutes manipulation. That standard is the level of concentration present in any market at any time, and the resultant price distortion caused by that concentration. In every manipulation case ever brought by the Commission, the level of concentration held by the perpetrators (or alleged perpetrators) was the prime determinant of the manipulation. Yet in no manipulation case ever initiated by the Commission was the level of concentration greater than the level of concentration held by the big short(s) in COMEX silver.

The evidence of this historic concentration in COMEX silver comes from data reported by the Commission itself, in the form of the August Bank Participation Report and the weekly Commitment of Traders Reports. This means that the CFTC can’t question its own source data. Furthermore, other government reports from the Office of the Comptroller of the Currency (a part of the U.S. Treasury Department) confirm an unusual concentration in silver (and gold) OTC derivatives. Therefore, no one can deny that the concentrated short positions exist in silver, even though no one can explain a legitimate reason for why they exist.

Completing the argument that the CFTC is violating commodity law by failing to apply its own past standards of action despite verifiable levels of concentration, is the widespread notice received from many hundreds of you. As a result of your petitions and the specificity and importance of the issues involved, the Commission has been forced to respond. Just in the past few years, there have been lengthy responses from the Commission’s Division of Market Oversight (DMO) regarding the allegations of manipulation in silver (May of 2004 and 2008) and the initiation of a formal silver investigation by the Division of Enforcement on September 25, 2008.

Because of continued data from the CFTC and subsequent market developments that strengthen the manipulation argument, the responses from the DMO have done little to convince growing numbers of observers that silver is not manipulated in price. At the very least, the CFTC is losing the battle of public opinion, as there is little obvious public support for their contention that all is well In silver. Certainly, with the release of the August Bank Participation Report, the case for manipulation grew stronger still. This report indicated that one or two U.S. banks held a net concentrated short position of more that 25% of the world annual mine production of silver, a level of concentration never witnessed in any market. Suddenly, the question became not if there was a manipulation, but how could such an historic extreme concentration not be manipulative? No explanation has been offered.

So obvious was this evidence and so strong was the public outcry over it, that the CFTC hastily convened a formal investigation around September 25. But it has become obvious that this investigation was designed to diffuse public outrage by stalling the search for the truth. This has allowed the big short manipulators (thought to be led by JP Morgan Chase) to complete their short covering during the epic sell-off. In fact, at the time of announcement of the silver investigation, the price of silver was above $13 an ounce, down almost 30% from the summer highs. After the investigation was announced, silver fell an additional 30%.

Let me be clear, I am alleging that the CFTC permitted JP Morgan to continue their manipulation of the silver market under the guise that the Commission was investigating. In reality, the CFTC sided with and allowed JP Morgan to profit and clean up its shorts at the expense of great loss to the public. Shameful and illegal as this may be, the sad truth is that Commission officials are more likely to curry favor, including post-Commission employment from the likes of a JP Morgan or the CME Group than from any member of the public.

The ongoing silver investigation looks to be a sham and a whitewash. In feedback from some people who have been interviewed by the Commission and Enforcement Division staff, I have been told that in addition to being poorly versed on silver specifics, the staff has been biased and has attempted to convince those being interviewed that there is nothing wrong in the silver market.

I have recently privately complained to the Inspector General, as I did publicly back in May, that there is something seriously amiss with their investigative process. That process should be about fact-finding and the discovery of the truth and not in trying to convince anyone of anything. It is clear to me that the CFTC is not interested in upholding and enforcing the very law they have sworn to uphold.

What’s the purpose in me writing these thoughts again? Quite frankly, the CFTC may have little to do with silver going forward. The Commission is responsible for where we are in silver, through their failure to reign in the manipulators for so many years, but that was then, not now. Now there is little anyone can do to derail silver from the spectacular price journey it is about to undertake. Conditions have become so extremely bullish, that it is hard for me not to view silver as a sure thing. So why harp on the failures of the CFTC? Why not just sit back and enjoy the ride?

I believe we all have a responsibility to leave the world a better place than we found it, in any and every way we can. I am sick and tired of observing the financial shenanigans that have occurred on a regular basis that have hurt more ordinary citizens than ever before. I am sick and tired of watching the few illegally enrich themselves at the expense of the many. I am particularly sick and tired of observing taxpayer-funded regulators look the other way while those they have sworn to protect are hurt badly.

Unfortunately, there is not much we can do now about the great financial stresses inflicting us currently, like the housing and credit and equity debacles. This silver manipulation is different. While it affects many people, compared to the other crises, the number of apparent victims is small. But the crime itself, and the regulatory failure to correct that crime are also different in that they are very specific and current. This is a crime in progress and those responsible for it are very few in number.

There were scores of federal and state regulators who dropped the ball and failed to regulate properly in the housing and credit mess. That makes it harder to assign blame and extract retribution. In silver, there’s only one front-line regulator and a handful of short-selling crooks. The CFTC can’t hide and pretend it was the fault of some other federal or state regulator. All it can do is stall and hope silver blows up later, rather than sooner.

This is not about some ineffective federal regulator unable to do its job and wasting taxpayer funds. Sadly, that’s not big news nowadays. The situation is much more serious. This is about many hundreds of concerned citizens alerting the sole regulator of its failure to enforce the most important law that regulator was created to enforce, and that regulator looking the other way.

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