By Chris Carey, Bailout Sleuth

The former head of a failed bank was arrested Monday and charged with 10 federal counts including allegations that he tried to fraudulently obtain millions through the TARP program, according to a statement from federal prosecutors.

Federal officials say that Charles Antonucci, former president and chief executive of The Park Avenue Bank, gave false statements as he sought more than $11 million in aid for his bank through the Troubled Asset Relief Program.

Antonucci is the first defendant to be charged with trying to defraud the program.  He also faces a slew of other charges related to his allege use of his position at the bank to enrich himself.

Antonucci paid $2 million bond Monday and surrendered his travel documents; he is not to leave the New York area.

Among the charges Antonucci faces are bank bribery, embezzlement of bank funds and fraud. He faces a maximum of 260 years in prison.

“Lying to financial regulators is the economic equivalent of obstruction of justice,” said U.S. Attorney Preet Bhara in a statement.

Regulators closed Park Avenue Bank on Friday, and the Federal Deposit Insurance Corp. arranged for it to be taken over by Valley National Bank. The four-branch bank, which had $494.5 million in deposits and $520.1 million in assets, primarily served small businesses.

Antonucci was president and CEO from June 2004 to October 2009, and he also served on the bank’s board of directors.

Antonucci is accused of “self dealing” by extending credit to customers to whom he had financial ties; granting overdraft credit to a customer in exchange for the use of his plane; and using the bank to pay expenses on properties he owned.

Prosecutors also say Antonucci used a complicated “round trip” transaction to try to defraud bank regulators into believing he had invested $6.5 million of his own money into the bank to try to increase its capital position and make it eligible for TARP funds. In actually, he had taken those very funds from the bank in the first place.

First, the bank loaned funds to entities tied to Antonucci. Then, those entities transferred the funds to Antonucci. Finally, he invested that money back into the bank – in exchange for common stock representing a 52 percent controlling interest in the bank’s holding company.

As he sought $11 million in TARP funds from the Treasury Department, he “falsely represented that he had made a substantial, personal capital contribution to The Park Avenue Bank,” prosecutors said.

Upon learning that the FDIC would not recommend his bank for TARP, he withdrew his application voluntarily, saying in a press release that the bank was strong and wanted to avoid the stigma of accepting government money.

“This case should stand as a stark warning to would-be wrongdoers that if you attempt to profit criminally from this historic program, SIGTARP and its law enforcement partners will work tirelessly to ensure that you will be caught, you will be charged, and you will be brought to justice,” said Special Inspector General for TARP Neil Barofsky in a statement.

Additionally, an unnamed co-conspirator allegedly told pastors of Calvary Springs Chapel in Coral Springs, Fla. that if they invested $103,940 in the purchase of a bond, he would borrow four times that amount in foreign markets and pay the pastors the full maturity of the bond, $604,848, within weeks.

The co-conspirator simply had the pastors put the money into an account owned Antonucci, prosecutors said. They never received any money bank, and Antonucci and his co-conspirator split the pastors’ money, prosecutors said.

More articles from the Bailout Sleuth….

By Karl Denninger, The Market Ticker

Let’s put a bit more color on my morning HAMP Ticker – this time at a more-macro level of the economy.

To recap, here’s the table in question:

From this we can “back in” to the median annual income of these completed mods.  If $837.86 is the median home payment and post-modification it is 31% of gross income (Front end ratio) then we get $2,703 a month in median income, or $32,433 a year.

This is gross income – that is, before taxes.

As I pointed out such a person will pay (monthly) $206.70 in FICA and Medicare tax (the half they “see” in their check) and will have another $300 or so a month withheld in federal income tax.

So we start with a “baseline” of $2,196 monthly that comes in the door (ex payroll and federal withholding taxes, but not accounting for state income tax.)

We know, however, that these people have 59.8% of their gross income that goes to all debt service (house and all other mandatory debts), which means that they have $579.30 to spend on everything other than that mandatory debt service a month.

Now realize this: “Mandatory” debt service only includes minimum payments on revolving accounts such as credit cards!  Making a minimum payment on a credit card, while charging nothing new, results in a pay-down period of many years.  But most people will charge back up at least the principal paid down (which isn’t much when paying the minimum especially if you have a 29% interest rate!)

Diane Olick and other analysts say that 2 million homes have “started” HAMP.  Of those only something like 16% have wound up in permanent modifications – under 200,000 – which is what the above represents.  In addition, another 2 million+ people have gone delinquent since the HAMP program began.

The remainder of the HAMP “starts” either have not or will not lead to permanent modifications.  That is, their internals are either worse than or equal to the above – it is almost impossible they are better, or they’d be permanent modifications.

Let’s put color on this.  According to Diane Olick 7.5 million homes are either delinquent or in foreclosure.  23% of those delinquent properties have been so for more than a year yet have not foreclosed. 

These are people who are spending in the economy, propping up GDP and economic numbers, because they are making no payment on their house at all.

Let’s remember that when these loans “resolve”, no matter how they do, that spending power will instantly evaporate in the economy.  Whether their loan is modified into a “sustainable” one (ha!) or whether they are ejected from their house and become renters either way the more than $1,000 a month they are not paying for their mortgage, but are instead dumping into consumer spending will evaporate as they will be forced to spend that money on housing once again.

This is not an inconsequential amount of money.  If we assume the “average” amount not tendered in mortgage (and spent into the economy) is $1,000 per month per home, this is $7,500,000,000 – or $7.5 billion a month (that is, $90 billion a year) that is being “contributed” to the economy falsely and will come back out – one way or another.  It simply must.  This is a bit more than 1/2% of GDP – hardly insignificant – and that consumer spending fuels economic activity with a multiplier effect (the money these people spend at Starbucks pays the employees of Starbucks, who then spend THAT money into the economy.)  There is much argument about the multiplier effect of various government spending programs, but there is less dispute that private spending always has some multiplication factor associated with it.  Therefore, the $90 billion number is understated – the gross GDP “goose” from these defaults may be as high as double that $90 billion, or 1% of GDP!

To this we must add the positive impact of credit-card and other defaults.  The paradox is that failing to pay down debt – that is, defaulting instead of paying as agreed, actually increases GDP, because such a refusal to pay down debt while the money is spent elsewhere causes consumption to be supported.

This, along with the “fiscal juice” from running $1.5 trillion in deficits, are two of the biggest issues facing a “sustainable” economic recovery.  The refusal to understand this dynamic is responsible, in large part, for the (false) belief that our economy is in fact recovering.

You can’t really blame most of the ToutTV and media idiots for their lack of thinking in this regard.  It requires analysis, which none of these folks actually do, in order to suss out what’s going on.  We haven’t had a debt-overhang-fueled recession for 70 years – the last one was The Depression in the 1930s.  Literally none of the current reporters and pundits was alive and trading in the markets or anywhere else the last time it happened, and all we have is a (biased) historical record – an incomplete recollection.

How many people think that the 1920s – the “Roaring 20s” – were a time of fiscal reason and a booming economy?  Nonsense.  The “Roaring 20s” were a time of rampant speculation and debt-binging.  The illusion of prosperity was bought, paid for and maintained the same way it was this time in the 2000s – with debt.  Yet if you read “history” you will find scant if any mention of this fact.

We’re not out of this one folks, and we’re not going to get out of it either, so long as we keep pretending that loans that aren’t performing – and can’t – are “money good.”  Further, the temporary and ethereal “boost” to consumption and thus GDP that comes from debt defaults will dissipate.  It mathematically must, as eventually creditors run out of cash flow to maintain the illusion that they have “performing” assets when payments are in fact not being made.

More articles from the Market Ticker….

By Karl Denninger, The Market Ticker

You know it’s going to get good when LIESman says something like “there is a point in time when ignorance goes from being amusing to being dangerous” to a grizzled trader like Santelli.

Well, Liesman did, and…. (we’ll do facts after the video)

Now for the facts:

Any government can pump stock prices of insolvent institutions for a while by allowing them to lie on their balance sheets.  The poster child for this is, of course, Lehman brothers.  I reproduce for your edification a chart showing two quarterly reports during which Lehman was arguably insolvent (light gray) and then (in pink) a further period of time spanning more than a month when their counterparties knew they had no cash, yet FRBNY and The Fed, including but not limited to FRBNY, Paulson, Geithner and every other bank they dealt with knew they had no money.  Yet their stock continued to trade, the company continued along, and Dick Fuld was on CNBS saying he was going to “burn the shorts.”

What was the outcome Steve?  Was it “all ok in the end” even though for a period of more than six months the stock continued to trade and in fact after that first report went up significantly?

What caused the collapse?  They ran out of cash flow.

Now about those other large banks and their balance sheets….

As a corollary to the above governments can also pump markets generally by replacing private demand in GDP with borrowing and spending, just as you can by using your credit card even though your income has been cut off.  This can and does lead to huge market rallies – for a while.  However, unless you can manage to increase credit in the system generally, meaning that private parties “come back” and take over from government, eventually the government becomes unable to sustain such a practice, just as you become unable to sustain such a practice.  In point of fact the government has borrowed and spent ten percent of GDP (in addition to all that it was spending before) for the last two years.  This has prevented the recognition of an economic depression in the “statistics” put forward by government, but that replacement of private demand is not, in fact, private demand!  Thus you have unemployment and underemployment, even under the government’s statistics (among those who want jobs), hovering near one person in five in the economy, and only 60% of the labor force is actually working.  The other 40% of working-age, non-institutionalized people, are not working – which means they’re drawing on social programs of some sort.  This, of course, exacerbates the demand for the government to continue borrowing and spending that additional 10% of GDP.

What will cause this to collapse?  The same thing – recognition that the banks are in fact broke (and there are a bunch of them that are), inability to sell or roll over enough debt to satisfy the leaches in society, one of the rating agencies growing a pair of balls and downgrading the United States and more.  Indeed, a lockup in the credit markets could easily occur just as it did in 2008, and for the same reasons – a recognition that “heh that jackass over there has no good collateral!”

Can the government keep this from happening forever?  No.  

Can it do so for “an extended period of time”?  Sure, but for exactly how long?

That’s the key, isn’t it?  We’re not running an 89% debt-to-GDP ratio, it’s in fact over 500%.  We’re lying just as Lehman was lying, but on a grader scale.  Yet when Rick Santelli brings this up, the pump monkeys go nuts.

Why?

Well gee, if you want to sell something to someone that is based on a fraudulent premise, how much luck will you have if the truth is exposed?

‘Nuff said.

More articles from the Market Ticker….

T.R. Reid hosts a Presentation of Money-Driven Medicine on Link TV (see reception information) As taken from Maggie Mahar’s Health Beat Blog. A special investigative TV program is being aired detailing healthcare costs and the healthcare system. The topic is timely and well worth the time watching in order to gain a greater understanding on what is wrong with healthcare in the US.

Read more….

"The bill clamps down on conflicts of interest at the Federal Reserve, making the head of the New York Fed, for example, a position appointed by the president of the United States and not hand-picked by the very bankers the New York Fed is responsible for regulating," the Connecticut Democrat told reporters as he unveiled his bill. // Critics said the proposed governance change could weaken the central bank's independence. – Reuters¹

Well duh.  As we noted in, among other places, Doom's introduction to our recent Jesse / Ives Smith re-post, the NY Fed is actually pretty independent from the Fed Board itself, and within its present configuration with the great banks of Wall Street has about as much independence from Washington as Florence did from the papacy during the 16th Century.

IMHO even granting the Fed supervision over the Second District would be an improvement

LATER: Obama's FDR moment seems to be turning into his Andrew Jackson moment,⁶ if he's got the will.  Just the prospect of the first real regulation of Wall Street's IBs in decades will inevitably turn Dodd's proposal into a Superbowl of financial lobbyists.  Meanwhile, the Daily Bell has an article² on the Joseph Stiglitz Fed criticisms which has some nice things to say about the web.

The Fed is in such bad odor because the Internet has exposed its conflicted inner workings to people throughout the United States for years. Viewers, however, likely did not take the Internet's presentations seriously for a long time. But the advent of the financial crisis has changed this perception. By now, even, many may have found the Internet-based free-market interpretations of the Fed's mechanisms more compelling than the dry-as-dust socialist perspectives offered in manifold university textbooks or distributed plentifully by the Federal government and the Fed itself.

The WSJ actually asserts³ that "[t]he biggest winner in Mr. Dodd's bill appears to be the central bank." Murdoch's gang is ignoring the US appointment of the NY Fed Pres under the proposal so hard they might as well be staring straight at it.  The story's first paragraph is pretty ironic since up to now those same big banks were hardly being overseen at all.

WASHINGTON—U.S. Senate legislation aimed at overhauling regulation of finance would cost large banks billions of dollars, prevent them from taking certain risks and create a new regulatory infrastructure to oversee their activities.

Financial blogger Jr Deputy Accountant (JDA — great handle ) doesn't appear to agree with me.⁴ And Igor points out that I wasn't even the first up on this story with the "D" word.  Don't miss JDA's just-released post "Chris Dodd Taps the Fed's Secret Backdoor."

Notice you didn't hear a peep out of the NY Fed when a handful of clever Fed Presidents were campaigning to keep the Fed "independent" and free from political interference. JDA will ignore the fact that they gave that up about 18 months ago when they pledged whatever it takes to prop up everyone except Lehman Brothers as this is not about arguing over whether or not they are actually independent but criminalizing the NY Fed. Duh.

… and the plot thickens; this⁵ just in from Salon.

The Financial Times' Tom Braithwaite dropped this intriguing bomb:

The new proposal would bar appointments of Wall Street bankers as directors at the New York Fed.

I hadn't seen this news elsewhere, and it took a little digging to find the relevant text in the bill. And having done so, it's unclear that the bill specifies exactly what the FT is reporting.
…

Under the Dodd bill all class A and B directors will be appointed by the Board of Governors of the Federal Reserve System. …

—————–

[1]: "President would tap NY Fed chief under Dodd bill", Reuters, March 16, 2010.

[2]: "Nobel Winner Stiglitz Calls Fed Corrupt", Daily Bell, March 16, 2010.

[3]: "U.S. bill takes aim at banks", by Corey Boles and Michael R. Crittenden, Wall Street Journal, March 16, 2010.

[4]: "Chris Dodd's Last Land Mine: Transforming the Fed and Screwing the Consumer", Jr Deputy Accountant, March 15, 2010.

[5]: "Getting the bankers out of the Fed: See ya later, Jamie Dimon. Under the Dodd bill, bankers will no longer be able to choose their own supervisors", by Andrew Leonard, Salon, March 16, 2010.

[6]: "Dodd Targets Banker Influence Over New York Fed", by Alain Sherter, BNET, March 15, 2010.

Although the Fed was founded nearly a century ago, disputes over who controls the nation’s money supply and credit date back to the founding of the U.S., and certainly to the creation of the First Bank of the United States by Alexander Hamilton in 1791. Southern planters and businessmen vied for influence with mostly Northern, urban financial interests. New York bankers later helped sink the First Bank, largely for competitive reasons, culminating in President Andrew Jackson’s move in the 1830s to yank the charter of of the Second Bank of the U.S.

Flash forward to 1913. The Federal Reserve Act, which established the Fed system, cemented banks’ power, especially that of large New York institutions. It shunted aside concerns over the availability of credit for farmers and instead focused on meeting the needs of financial firms, including creation of a more flexible currency. In an important shift, the bill also transferred chief responsibility for stopping financial crises from New York banks to the newly created reserve institutions; that liberated banks to focus on more profitable endeavors.

Read more….

Zero Hedge

GATA’s Adrian Douglas has done a tremendous job of combing through dozens of hundred-plus page FOMC transcripts, and has compiled numerous quotes by assorted FOMC-related personnel, including former Chairman Greenspan, which provides yet another piece of evidence, demonstrating the persistence of the Fed’s gold price suppression scheme. As Douglas puts it: “My thinking was that if an organization is so inept at covering up that
detailed transcripts were retained, then perhaps it is also inept at
completely redacting sensitive and incriminating information. What I
found is quite astounding and serves as documented evidence by the
Federal Reserve itself that it manipulates the gold market.” We present the relevant quotes dug up by Douglas, whom we applaud for his effort, together with his very relevant commentary, which once again exposes the Fed’s covert gold price suppression intentions.

In the March 21, 1978, FOMC meeting —

http://www.federalreserve.gov/monetarypolicy/files/FOMC19780321meeting.p…

– the following exchange took place.

* * *

CHAIRMAN MILLER. The Treasury has severe reservations about it.
Originally, two weeks ago, they were taking the position that they
would not be in favor of it — that it raised too many problems for
them. Since then I think they have become a little more open-minded
about it. However, I think the first avenue is apt to be the sale of
gold. Sales of gold were under consideration and were deferred partly
because of the French elections, which are now over. So I think it’s
likely that the Treasury will start a program of selling gold, which I
personally would favor. There are a lot of advantages in using gold
because at least then we don’t end up with debt and the currency risks
that go with it. So I think that’s an avenue that should be pursued.
There has been a discussion about the level of gold sales that are
possible — what the market can absorb and that sort of thing. Henry
can correct me, but I believe the Treasury feels that they could sell
about 300,000 ounces a month.

MR. WALLICH. That would be a very moderate amount — something like
less than 60 million. And bear in mind that unless they can develop a
means of selling the gold for foreign currency in a way that doesn’t
cause holders of dollars to buy that foreign currency in order to buy
the gold, it could be completely counterproductive. Then there isn’t
going to be much of a net effect. There is some because, after all, we
are importers of gold, which may reduce the imports of gold and may
make the trade balance look a little better. There is some portfolio
shift when there is gold in portfolios instead of dollars, so I
wouldn’t say it’s without effect, but there are lots of qualifications
on the possible success.

CHAIRMAN MILLER. The nice thing about this problem is that it’s
surrounded by dilemmas! Everything you do has an adverse effect on
something else. Nothing is ideal. I might add that we live in a
situation where the market is very realistic, very factual. That’s why
the possibility that gold would be sold caused the gold price to drop
by $5. You don’t have to sell gold; you just have to breathe [that you
may] one day.

* * *

The last sentence by Chairman William Miller (Fed chairman in 1978
and 1979) telling the FOMC that the gold market can be manipulated by
propaganda is very significant. This would certainly make Joseph
Goebbels proud. This manipulative deception has been played out time
and time again since then. This is why official gold sales are always
announced in advance and the announcements are repeated many times, as
happened with the International Monetary Fund’s gold sales.

At the FOMC meeting of July 9, 1980 –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19800709meeting.p…

– the following discussion took place.

* * *

MR. BAUGHMAN. Is it considered a political no-no to sell gold in the current environment?

CHAIRMAN VOLCKER. Oh, I don’t think so, necessarily. I don’t think
it’s a political problem in the sense that you may be suggesting. It’s
a question of whether it’s very useful or desirable at this stage. [If
we sold gold] we’d have to do it alone; I think that’s pretty clear. It
isn’t anything that’s ruled out a-priori, but it’s a practical matter
of whether it’s a good idea.

MR. BAUGHMAN. Well, it’s between selling assets and borrowing money. That seems to me the significant difference.

VICE CHAIRMAN SOLOMON. The psychology, Ernie, is that [selling gold]
seems to be much more effective if it’s a component of an overall
package of forceful measures than if it is done by itself. In the
present climate it would look like a major act of weakness. And that
might spur some additional dollar selling unless we did it on an
enormously massive scale, not just the levels that we have before. On
the other hand, if the situation gets to a point where once again we
have to begin thinking carefully of a package, then along with some
monetary policy measures it would be appropriate and add to the
effectiveness — this is my own personal feeling — to do some
substantial gold selling. And in that situation I think the Congress
would understand that. We’d have less of a political problem also. So I
think both factors operate.

CHAIRMAN VOLCKER. I should say, in connection with the political
problem, that I don’t think there are any great political constraints
so far as the thinking in the Administration is concerned. There are
politicians who would make a noise that would reflect upon the
credibility of the action. If we sell some gold and then immediately
get some congressional opposition, the market would say: “Well, they’re
not going to sell very much because there’s too much opposition.” And,
therefore, it might not be very productive in terms of the impact we’d
want to achieve.

MR. BAUGHMAN. There would be some grassroots opposition to it. I can report that, but I don’t have any impression. …

CHAIRMAN VOLCKER. Perhaps I spoke a little misleadingly because that
kind of opposition, I think, does reflect on the credibility of the
action. It raises questions about whether it could be sustained and
what the [total] amount would be and whether it’s really an accepted
technique or not, even though in some sense I think it’s not a
political deal for the Administration except in terms of appraising
that reaction. I can’t quite see the Congress opposing it in a formal
sense but there would be a lot of noise by these limited groups. We
have to ratify these transactions.

MR. SCHULTZ. So moved.

* * *

What is noteworthy is the comment by Vice Chairman Solomon when he
says selling gold “seems to be much more effective if it’s a component
of an overall package of forceful measures than if it is done by
itself. In the present climate it would look like a major act of
weakness. And that might spur some additional dollar selling unless we
did it on an enormously massive scale, not just the levels that we have
before.”

This is without a doubt a proposal to undertake gold market
manipulation, and what’s more it is proposed to be on an “an enormously
massive scale.” This is not a discussion about selling gold based on a
motivation to maximize the profit from such sales. Furthermore, the
vice chairman admits to previous gold market intervention when he
recommends increased selling of gold that is “not just the levels that
we have before.”

What is shocking is the apparent cavalier approach to breaking the
law. Volcker says, “I should say, in connection with the political
problem, that I don’t think there are any great political constraints
so far as the thinking in the Administration is concerned. There are
politicians who would make a noise that would reflect upon the
credibility of the action. If we sell some gold and then immediately
get some congressional opposition. …”

Note that the proposal implies that gold sales would occur without the congressional approval required by law.

The “strong dollar policy” was concocted by Treasury Secretary
Robert Rubin in 1995. However, the mechanism by which such a policy
could be implemented in a supposedly free market was never explained.
GATA has long maintained that the policy involved the suppression of
the gold price. In December 1994 the following exchange took place at
the FOMC meeting –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19941220meeting.p…

* * *

CHAIRMAN GREENSPAN. President Jordan.

MR. JORDAN. I think the main part of our problem right now is
inflation psychology. It certainly reflects the lack of a nominal
anchor. It suggests that it would be helpful to have a politically
supported mandate to attain and maintain a stable value of the dollar.
If somehow we could achieve the conditions of a true gold standard –
without gold but the steady purchasing power of money in the minds of
people — over time it would make some of these short-term things that
we go through a lot easier to deal with.”

* * *

Well, how about that? Achieving the conditions of a true gold
standard without gold? Does that sound like a confidence trick? The
last sentence of the FOMC minutes above here has been redacted. It
would be extremely interesting to know the full extent of the
discussion.

In response to a question posed by U.S. Rep. Ron Paul in testimony
before Congress in 2005, Fed Chairman Greenspan confirmed that this
financial wizardry has actually been implemented:

http://www.lewrockwell.com/paul/paul267.html

* * *

MR. GREENSPAN: So that the question is: Would there be any
advantage, at this particular stage, in going back to the gold
standard? And the answer is: I don’t think so, because we’re acting as
though we were there. Would it have been a question at least open in
1981, as you put it? And the answer is yes. Remember, the gold price
was $800 an ounce. We were dealing with extraordinary imbalances,
interest rates were up sharply, the system looked to be highly unstable
– and we needed to do something.

Now, we did something. The United States. … Paul Volcker, as you
may recall, in 1979 came into office and put a very severe clamp on the
expansion of credit, and that led to a long sequence of events here,
which we are benefiting from up to this date. So I think central
banking, I believe, has learned the dangers of fiat money, and I think,
as a consequence of that, we’ve behaved as though there are, indeed,
real reserves underneath the system.

* * *

The last sentence is exactly what Mr. Jordan was pondering in the
FOMC meeting of December 1994: How to have a gold standard without
using gold. Greenspan says the Fed “behaved as though there are,
indeed, real reserves underneath the system.”

I think it is safe to say there is some financial wizardry that is
apparent by implication. One either has real reserves or one doesn’t.
To behave as if there are when there are not is a confidence trick
doomed to fail at some stage.

In the FOMC meeting of Dec 22, 1992, the Fed governors reveled in
the fact that accounting errors in gold shipments could improve the
U.S. balance of trade numbers –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19921222meeting.p…

* * *

CHAIRMAN GREENSPAN. Did I hear you correctly when you said that the
gold exports in October appear to have come from the coffers of the
Federal Reserve Bank of New York? Has anyone looked lately?

MR. TRUMAN. Well, I didn’t want to tell too many secrets in this temple!

VICE CHAIRMAN CORRIGAN. Obviously, we knew what happened to the gold, but I don’t think we knew what it did to exports.

MR. TRUMAN. What happens in the Census data is that the Federal
Reserve Bank of New York is treated as a foreign country. [Laughter]
And when a real foreign country takes some of the gold out of New York
and ships it abroad, it counts first as imports and then as exports.
However, the import side is not picked up in the Census data. So there
you get the export side of it.

MR. LAWARE. Great accounting!

MR. BOEHNE. Great confidence building!

MR. TRUMAN. That’s because you haven’t been filling out your import documents!

MR. ANGELL. Let me run this by again. You mean a country owns gold
and has it stored in the Federal Reserve Bank of New York and if they
ship it out, that’s an export?

MR. TRUMAN. And in the balance of payments accounts it also counts as an import, so it washes out.

CHAIRMAN GREENSPAN. The Federal Reserve Bank’s basement is a foreign
country. When they move it out of the basement into the United States,
it’s an import. Then, when they ship it out again, it’s an export.

MR. ANGELL. That makes sense!

MR. TRUMAN. And sometimes when they sell the gold, it might be sold
into the United States, so it should count as an import. It doesn’t
necessarily always show up as an export.

MR. BOEHNE. That really clarifies it!

MR. KELLEY. Does it have to get out of your vault at all in order to be considered an import and an export?

VICE CHAIRMAN CORRIGAN. Well, I’m not even going to try to answer
that. In this particular case I know what happened, so I think. …

* * *

The most intriguing part of this discussion is the question by
Kelley: “Does it have to get out of your vault at all in order to be
considered an import and an export?”

While there is no explanation of the thinking behind Kelley’s
question (it was probably redacted), it is reasonable to extrapolate
the inference that “ledger entries” for gold movements could be made to
the import or export accounts without any gold having been physically
moved.

At the May 18, 1993, FOMC meeting there was much discussion how gold
influences public attitudes toward inflation. There were discussions
about interfering in the gold market to change the public’s expectation
of inflation, and such postulated interference was even regarded as
amusing by the FOMC –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19930518meeting.p…

* * *

MR. ANGELL. Here’s what I think would happen. I don’t think we
should increase interest rates by 300 basis points, but, if we did, I’m
quite certain the price of gold would immediately begin a [sharp],
quick [drop]. It would happen so fast you’d just have to go and watch
it on the screen. If we made a 100-basis-point increase in the Fed
funds rate, the price of gold surely would turn back down unless the
situation is worse than I anticipate. If we made a 50-basis-point
increase in the Fed funds rate, I don’t know what would happen to the
price of gold, but I’d sure like to find out! [Laughter]… People can
talk about gold’s price being due to what the Chinese are buying;
that’s the silliest nonsense that ever was. The price of gold is
largely determined by what people who do not have trust in fiat money
system want to use for an escape out of any currency, and they want to
gain security through owning gold. Now if annual gold production and
consumption amount to 2 percent of the world’s stock, a change of 10
percent in the amount produced or consumed is not going to change the
price very much. But attitudes about inflation will change it.”

* * *

Later in the same meeting Greenspan pursued this line of thinking:

* * *

ALAN GREENSPAN: I have one other issue I’d like to throw on the
table. I hesitate to do it, but let me tell you some of the issues that
are involved here. If we are dealing with psychology, then the
thermometers one uses to measure it have an effect. I was raising the
question on the side with Governor Mullins of what would happen if the
Treasury sold a little gold in this market. There’s an interesting
question here because if the gold price broke in that context, the
thermometer would not be just a measuring tool. It would basically
affect the underlying psychology. Now we don’t have the legal right to
sell gold but I’m just frankly curious about what people’s views are on
situations of this nature because something unusual is involved in
policy here. We’re not just going through the standard policy where the
money supply is expanding, the economy is expanding, and the Fed
tightens. This is a wholly different thing. Anyway, I’m most curious to
get your views in these various respects, so please don’t be afraid to
throw things out on the table.

* * *

Greenspan proposed that if the gold price could be significantly
depressed, then the public’s inflation expectations could be radically
altered.

In an FOMC meeting in January 1995 Virgil Mattingly, the Fed’s general counsel, said the following –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19950201meeting.p…

* * *

MR. MATTINGLY. It’s pretty clear that these ESF [Exchange
Stabilization Fund] operations are authorized. I don’t think there is a
legal problem in terms of the authority. The statute is very broadly
worded in terms of words like “credit” — it has covered things like
the gold swaps — and it confers broad authority. Counsel at the White
House called the Treasury’s general counsel today and asked, “Are you
sure?” And the Treasury’s general counsel said, “I am sure.” Everyone
is satisfied that a legal issue is not involved, if that helps.

* * *

This comment suggests that the U.S. gold stock has been mobilized in
the market. When GATA urged U.S. Sen. Jim Bunning to pursue this matter
with Greenspan, Mattingly responded (http://www.gata.org/node/1181):

“These inquiries focus primarily on a statement attributed to me
that appears on Page 69 of the published transcript of the January
31-February 1, 1995, FOMC meeting to the effect that the Exchange
Stabilization Fund (ESF) has engaged in ‘gold swaps.’ Given the passage
of time, some six years, I have no clear recollection of exactly what I
said that day but I can confirm that I have no knowledge of any ‘gold
swaps’ by either the Federal Reserve or the ESF. I believe that my
remarks, which were intended as a general description of the authority
possessed by the secretary of the treasury to utilize the ESF, were
transcribed inaccurately or otherwise became garbled.”

That doesn’t pass the smell test. Mattingly’s comments “were
transcribed inaccurately or otherwise became garbled”? This is the same
organization that lied to Congress for 17 years about the existence of
any transcripts or recordings of the FOMC meetings. So do we believe
him?

Notice the very clever inference — “I can confirm that I have no
knowledge of any ‘gold swaps’ by either the Federal Reserve or the
ESF.” He doesn’t specify what type of “knowledge” he is talking about.
Is it knowledge that any swaps were ever made or is it knowledge of the
details of swap arrangements that were made? In any case Mattingly is
professing not to know; he is not denying that any swaps have occurred.

The following discussion took place at the July 1991 meeting of the FOMC –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19910703meeting.p…

* * *

ALAN GREENSPAN: Why have commodity prices failed to decline as much
as they ordinarily would during recession periods? Now, it also looks
as if commodity prices are not spiking upward in a recovery like they
ordinarily would. So we have a different picture in commodity prices
than I’ve seen in a recession and, frankly, I’m very puzzled by it. At
the same time that commodity prices do not show the extent of the
recovery, I think it’s somewhat strange that gold prices failed to move
down. Given central banks’ reduced willingness to own gold, or given
what I see as a reluctance in the foreign central banks and others to
hold as large gold stocks, given countries in southeast Asia who have
changed their attitudes [toward gold], and given the Soviet Union
[sales], I don’t understand why gold prices do not come down. It
suggests to me that there may be some what we call ‘crazies’ out there
who believe that gold is a good [inflation hedge]. And I guess I think
that [inflation concern] is in the long bond.

* * *

Greenspan thus labels as “crazies” those investors who want to
protect their wealth against the promiscuous money creation of his
Federal Reserve. In 1966 Greenspan wrote an essay titled “Gold and
Economic Freedom” in which he recognized the unique properties of gold
as an inflation hedge –

http://www.321gold.com/fed/greenspan/1966.html

“In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. There is no safe store of
value. If there were, the government would have to make its holding
illegal, as was done in the case of gold. If everyone decided, for
example, to convert all his bank deposits to silver or copper or any
other good, and thereafter declined to accept checks as payment for
goods, bank deposits would lose their purchasing power and
government-created bank credit would be worthless as a claim on goods.
The financial policy of the welfare state requires that there be no way
for the owners of wealth to protect themselves.

“This is the shabby secret of the welfare statists’ tirades against
gold. Deficit spending is simply a scheme for the confiscation of
wealth. Gold stands in the way of this insidious process. It stands as
a protector of property rights. If one grasps this, one has no
difficulty in understanding the statists’ antagonism toward the gold
standard.”

And clearly once Greenspan had sold his soul to the devil and become a “statist” himself, he joined the antagonists of gold.

The following is a very enlightening discussion at the July 1995 FOMC meeting –

http://www.federalreserve.gov/monetarypolicy/files/FOMC19950706meeting.p…

* * *

CHAIRMAN GREENSPAN. I think I’ve got it! [Laughter] You are telling
me that the SDR [Special Drawing Rights] certificate comes out of the
Treasury and we cancel the Treasury obligation and it is wholly an
asset swap so that the debt to the public of the U.S. Treasury goes
down by that amount. Is that what happens? That solves President
Jordan’s problem too! [Laughter]

MR. JORDAN. Can I follow up on that? The same thing happened when we
changed the price of an ounce of gold from $35 to $38 and then to
$42.22. The Treasury got a windfall of about $1 billion to $1.2 billion
in both of those so-called devaluations. So an issue on this is: What
was the dollar price of SDRs that we monetized? You say I have an asset
on my balance sheet and I don’t know what the value of it is.

CHAIRMAN GREENSPAN. It’s about $42.

MR. TRUMAN. It’s $42.22; it’s equivalent to the official price of gold.

MR. JORDAN. We do this at the official U.S. Treasury price of gold?

CHAIRMAN GREENSPAN. Do you mean that we can lower the debt to the
public by moving the price of gold up to the market price? That could
cut the debt back by a not insignificant amount!

MR. JORDAN. I have been trying not to mention that publicly for fear that someone might want to do it.

CHAIRMAN GREENSPAN. It’s probably too late; we just mentioned it.

MR. JORDAN. It will become known five years from now!

MR. LINDSEY. Five years from now it will be read in the transcript for this meeting.

MR. BLINDER. By which time it already will have been done.

* * *

This exchange is extremely significant because it recognizes that
external debt of the United States eventually will have to be balanced
with the amount of gold claimed to be held by the Treasury.
Interestingly enough the Fed doesn’t want this information to be known,
as this would essentially devalue the dollar overnight and give instant
hyperinflation. But as Greenspan points out, it would inflate away the
debt.

The five-year delay in releasing information to the public is
clearly viewed by the Fed as a way to disadvantage the public. When the
Fed and Treasury are forced by market conditions to balance the U.S.
government’s debt with its gold holdings, the dollar will be massively
devalued and gold will be multiples of its current price. This would
certainly make it advantageous to be one of the “crazies,” as Greenspan
affectionately calls gold investors.

I think the true crazies will be shown to be those people who have
drunk the Kool-Aid to believe that a currency can maintain its
purchasing power when the central bank confesses to employing a
confidence trick — that it is “behaving” as if there were real
reserves underneath its currency system.

What can be concluded from these insights into the deliberations of the FOMC?

– On several occasions the Fed discussed targeting gold prices with its policies.

– The Fed admits that propaganda is effective against gold
investors, insofar as just mentioning the possibility of selling gold
can drive down the gold price.

– The Fed at least contemplated interfering in the gold market, and
on a massive scale. The Fed admits that the U.S. government has sold
gold with the intention of reducing gold’s price.

– The record shows that the Fed opined that the statutes of the
Exchange Stabilization Fund have legitimized “the gold swaps.” Despite
claims that this statement has been inaccurately transcribed or
garbled, recent information suggests otherwise. In response to GATA’s
request to the Fed last year under the Freedom of Information Act for
access to Fed documents about gold swaps, Fed Governor Kevin M. Warsh
confirmed that the Fed does indeed have gold swap agreements with
foreign banks:

http://www.gata.org/node/7819

– The Fed does not want it to be known that the external debt of
the United States could be substantially reduced by revaluing official
gold at the market price, lest someone wants to do that. This is an
admission that the official U.S. price of gold of $42.22 per ounce is a
matter of smoke and mirrors. The ability of the Fed and Treasury to
create money is linked to the only liquid collateral they have, gold.
The gold price that is required to make the value of U.S. gold equal to
the dollars issued is multiples of the current price, and is heavily
dependent on how much unencumbered gold the Treasury still holds.

– The Fed expressed the utility of having the virtues of a gold
standard without using gold itself. Greenspan later confirmed that the
Fed was behaving as if it was on a gold standard, as if there were
“real reserves” underneath the system. This supports GATA’s claims that
the gold price has been suppressed by an increase in the supply of
“paper gold” — gold that investors believe they have bought and own
but is really no more than a certificate saying they own the gold. This
is the case with the London Bullion Market Association’s unallocated
gold accounts, unbacked exchange-trade funds, pool accounts, and gold
derivatives.

The demand for real physical gold bullion is surging in the face of
an impending daisy-chain of sovereign debt defaults. This threatens to
expose the confidence trick — that much more gold has been sold than
exists. I have explained this in a previous essay, “The Tiny Market
that is the World’s Biggest”:

http://www.gata.org/node/8248

The Federal Reserve can “behave” as if there are real reserves under
the U.S. dollar, but there are none. A study of the heavily redacted
and edited minutes of the Federal Open Market Committee reveal a
penchant for targeting and manipulating gold prices, and deceiving
Congress and the public.

The words of Alan Greenspan from “Gold and Economic Freedom” could not be more relevant:

“This is the shabby secret of the welfare statists’ tirades against
gold. Deficit spending is simply a scheme for the confiscation of
wealth. Gold stands in the way of this insidious process. It stands as
a protector of property rights. If one grasps this, one has no
difficulty in understanding the statists’ antagonism toward the gold
standard.”

Like clowns at a rodeo, there are too many academics creating a
distraction discussing whether we will have deflation or inflation. We
are now in an era of unprecedented deficit spending — which means that
confiscation of wealth will also be unprecedented. One of the most
prolific money creators of all time has told us what to do to prevent
it: Buy gold. But buy real physical gold, not a gold receivable.

—–

Adrian Douglas is publisher of the Market Force Analysis letter (www.marketforceanalysis.com) and a member of GATA’s Board of Directors.

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Submitted by Nic Lenoir of ICAP

We have been bearish on the Shanghai composite ever since the index rejected the 50-dma around 3,100. Overnight we tested and so far held the 61.8% retracement of the rally since 02/03/2010 at 2,971, and we have the support of a possible triangle formation at 2,947. Long term I remain bearish on China for reasons I will detail a bit more lower. However this potential triangle support need to be invalidated by a break to the downside. Indeed, triangles are almost exclusively continuation patterns within a trend, and in the case of an horizontal triangle it is always the case. Triangles however need 3 touch on one side and 2 on the other to be validated technically, so it is not a forgone conclusion that it is what the market is doing. This is why it is key break to the downside here, if not expect 3 months of consolidation between 3,000 and 3,240 (yawn).

I included again the chart of Copper and Copper/China PMI to show the obvious strong correlation between commodities ad China’s PMI / Growth / Equity Markets. Copper gapped lower this morning. Ideally we would have preferred to gap below 332.20 to leave the price action from March 1st to 12th as an isolated island… wishful thinking. Still, we gapped down and as I have argued several times Copper has rejected a key resistance and fundamentals are not so good with Chinese PMI rolling over and inventories quite lofty. USDCLP has consolidated after the initial spike following the retest of the former downtrend channel at 505, further appreciation is definitely tied to a break lower of both copper and Chinese equities.

In terms of fundamentals it is very interesting that so many people focus on the Yuan appreciation. I am personally rather interested in the political bickering surrounding currency float for a totally different reason: China had last year 32% YoY growth in monetary supply. All the buildings going up in China are fueled by the PBOC printing its positive trade balance every month and a flurry of lending. When it comes to lending and despite some feeble attempts to curb it, January and February have in fact shown very strong lending by Chinese state banks. If you stop for a second and imagine the consequences of China letting the Yuan float, it is rater scary. There would most likely in the current environment be an influx of dumb money into China. This would hurt their competitiveness, as well as their rationale/ability to print their positive trade balance every month. So beyond the initial influx of money, it would hurt their exports and kill their monetary growth which historically is highly correlated to the performance of their stock markets and commodities. Also the next 20 years are a fast aging one for China’s population courtesy of the one child (boy?) policy so that will add a nice deflationary headwind to the local demand. With all that factored in, I actually think the end result beyond initial speculation of a fully floating Yuan would be a very very weak Yuan. The problem is even more compounded when one considers the amount of debt piling up in China. The following article details and sums up what is going on in the land of Chinese loans better than I could or have the time t do it: http://articles.moneycentral.msn.com/Investing/JubaksJournal/is-china-actually-bankrupt.aspx?page=1

This is why a slowly appreciating Yuan is the only possible path for the PBOC, but as always when you artificially build and foster imbalances there is a flip side… You will run into inflation problems and hiking rates on this huge pile of loans may not be a pleasant experience. The only real question is when the end game is, but I think overall this shows why China is pretty much bound to experience a very hard landing: 1929-style, or Zimbabwe- and then 1929-style is only a question of form but not end result.

Waiting for the big picture to kick in, it is probably worth taking partial profits on SHCOMP shorts, and add back on if we break 2,947/2,971. Long term preference is the downside, but we need a short-term technical validation for the momentum to build up now.

Good luck trading,

Nic  

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On FDIC Failure Friday, one of the odd names to make the list of bank failures was New York’s very own Park Avenue Bank, whose president Charles Antonucci in March of 2009 was trumpeting the bank’s “resilience” by saying “I don’t need TARP money” and as result declined to accept taxpayer bailouts. Certainly with Friday’s failure, Antonucci’s statement seems a little short-sighted. What is more relevant, is that it was just announced that Antonucci, who was the bank’s president from June 2004 to October 2009 has been arrested on bank bribery, embezzlement and fraud charges. Makes you wonder just how safe the “safe” banks are, if only the bailout recipients are doing so-so in the current environment (presumably, without any outright fraud disclosed just yet among the TBTFs).

From BNO Breaking News:

The former President of The Park Avenue Bank in Manhattan, which was
closed by regulators last Friday, has been arrested on fraud charges,
prosecutors said on Monday.

A spokeswoman for the U.S. Attorney’s Office for the Southern
District of New York said Charles Antonucci was arrested on allegations
of self-dealing, bank bribery, embezzlement, and fraud on the New York
State Banking Department, FDIC and TARP.

And some more from Reuters:

A former president of a privately-held New York bank, Park Avenue Bank, was arrested Monday on charges including bank bribery, embezzlement and fraud, a federal prosecutor said.

A source familiar with the case identified the banker as Charles Antonucci, who was president of the bank from June 2004 to October 2009.

On Friday, state regulators closed Park Avenue Bank, which had assets of $520.1 million and deposits of $494.5 million at the end of 2009, according to the Federal Deposit Insurance Corp.

The charges against the former bank president include self-dealing, bank bribery, embezzlement and fraud on the New York state banking department, FDIC and the Troubled Asset Relief Program (TARP), the statement by Manhattan U.S. Attorney Preet Bharara said.

His office said U.S. officials were to disclose more details at a press conference at 1 p.m. (1700 GMT) on Monday.

In November the bank applied for a bailout of less than $12 million under the TARP program but withdrew its application over concerns about restrictions on banks that receive taxpayer money, bank chairman Donald Glascoff said on March 10.

This is truly not surprising: in the corrupt world of Wall Street banking, it appears that rampant criminality has long since become the norm, with selective enforcement here and there to make it seem that perpetrators get punished. The next question: where’s Fuldo.

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Via UBS Financial Services

The Bulls Are Forced To Keep The Champagne On Ice For Another Day – The bulls thought they had it all set up Friday morning. For two weeks they had been tip-toeing toward a retest of the January highs. Thursday’s action finished with the S&P right on the goal line. The S&P closed Thursday’s session a hair’s breadth below its January high of 1150.45.

As I told Becky Quick on Friday morning, the bulls were confident enough to have the champagne on ice in the locker-room. They hoped to punch conclusively through the prior high and maybe stampede tons of sideline money into the market. At the very least, a significant run above the prior high would relegate the recent pullback to “correction” status and clear the path for the March ’09 rally to resume.

The bulls had their opportunity enhanced when Retail Sales, released at 8:30 a.m., were surprisingly strong, “despite the February snowstorms”. So, as brokers prepared for the opening bell, the futures were solidly in plus territory. As the trading day opened, the S&P shot above 1153 in a matter of minutes.

But, before the bulls could kick into second gear, or even begin to celebrate, the rally stalled. The stall occurred just as the University of Michigan Confidence Index dipped to 72.5 from 73.6. Whether cause, or just excuse, that release marked the day’s high for the S&P. For the balance of the day, the S&P and most other indices snaked around the unchanged line, again and again over the course of the day. The inconclusive action allowed the bears an opportunity to challenge. The “one-day” failure to break out was being called an indication of a potential double top.

So, the game is on the table. We’ll watch to see if the bulls can break out from the January levels and excite sideline money. Or, will the bears have a goal-line stand and force a double top. Friday did not give us a clear answer. Stay tuned!

It Was The Other Thing He Said – Most of the headlines coming out of China this morning are about Premier Wen’s slap at what he saw as U.S. meddling on the Yuan. But there may be another story. Here’s a take from UBS’s sharp-eyed London observer, Andy Lees:

China – Premier Wen Jiabao warned on Sunday that the Chinese economy could suffer from a “double dip” this year despite its apparent smooth recovery. Despite the beginnings of a world economic recovery, he said the main problems have yet to be solved. “The situation is potentially more dangerous than it looks,” said Ma Ming, dean of the department of applied economics at the Beijing Institute of Technology. Whilst growth has been fairly impressive, it has been achieved mainly on the back of government stimulus measures, including the $586-billion stimulus plan and the 9.6 trillion yuan ($1.4 trillion) in new loans last year. “A double dip is possible if the government exits from the stimulus package while enterprises have failed to adapt to the new situation,” said Zhao Xijun, finance professor of the Renmin University of China. “The government must continue its proactive fiscal policy and moderately relaxed monetary policy,”. Wen reiterated the continuity of those two policy lines and promised to strike a balance between maintaining economic growth, adjusting its economic development model and managing inflation; “Only in this way can we avoid the ‘double dip’.

Since many observers were counting on China to lead the recovery, a double dip could produce a global shock. It’s a story to be watched carefully.

Cocktail Napkin Charting – The S&P battle of 1150 is still on. Expiration week begins and may bring some added volatility. Given Friday’s narrow action, the napkins suggest the same numbers we saw Friday. Resistance for the S&P looks like 1155/1158 with support around 1138/1142. The McClellan Oscillator hints a big move (100/200 points) is due.

Spot! Spot! Come Back – Our ham radio pal passed along the latest sunspot data. It contained a surprise or two. Maybe I should say a surprise or four.

The sunspot readings for March 4th through the 10th were: 40, 35, 0, 0, 0, 0, 12. So, we had two days of multiple spots, followed by four spotless days and ending with one weak spot. Satellites indicate a new series of spots may be coming over the solar horizon. Nevertheless, don’t put that sweater in mothballs quite yet.

Consensus – The vigil of the FOMC statement may drag on trading. Also, the rumors of a looming “fix” in the Greece crisis may limit bets. If the bulls make the break to the upside, follow-through will be critical. Stay very nimble.

Trivia Corner

Answer - If 6 chartists could construct 6 charts in 20 minutes, the same six chartists would have constructed 36 charts in 2 hours. (Always divide time into time to narrow confusion.)

Today’s Question - Sal walked along the beach highway from Great Kills to South Beach. The distance was 5 miles and he walked at a steady two miles per hour. During his walk, 40 buses passed him from behind and fifty passed him coming from South Beach. What was the average speed of the buses?

History Trivia

On this day (or potentially two days either side) in the year 44 B.C., one Caius Julius Caesar chose to ignore the warnings of his wife and a certain part-time augurer named Spurinna. Caesar seeking to reform Rome went to the Senate to assume the broader, near-dictatorial powers he sought. There he was met by a group of former supporters and friends who felt he was betraying the reform movement, and took a stab at telling him so.

To celebrate, have an Orange Julius while lending an ear to a friend at a place called “The Forum”, and try not to make some too brutally pointed remarks on why, with today’s political debate, we may need the “V Chip” for C-SPAN.

(Editor’s Historical Note – To avert further complaints from the twelve, or so, NYSE members who pointed out that in an earlier episode, I failed to note that Caligula’s horse’s name was Incitatus {6 to 5 on the morning line} – nitpickers please note that originally the Ides of March was not necessarily March 15th but rather the period March 13th to 17th. Later…..Roman calendar makers would save on tablets and papyrus by designating the Ides to occur on the 15th of March, May, July and October. In other months, it was the 13th. If you’re not confused yet, let me try to explain derivatives to you.)

As we have noted previously, traders anticipated the Ides of March with just a little trepidation. Now they will face them with a large dollop of confusion.

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