Tuesday, April 28, 2015

May has been a target since the start of the year for the end of this consolidation phase

Stocks & the Future Phase Transition – Is Correction Needed First?

April 28th, 2015
Martin Armstrong
DJIND-W 4-25-2015
At the beginning of the year, we warned that the share market did not show any signs of breaking out to the upside before May, and that there was still a risk of a correction but foreign capital inflows would temper any decline. So far, that has proved to be correct. Nevertheless, we still should get that fake-out to the downside to help create the last rally for the bonds market.
DJFOR-M 4-28-2015
What may set the stage for the bond bubble requires a flight to quality. In other words, we may see a scare in the share market that sends cash running into the bond market to create the top. We do not see a break in the market that is long-term in nature, just a break that gets the majority anticipating a change in trend.
DJFOR-W 4-28-2015
Keep in mind that May has been a target since the start of the year for the end of this consolidation phase. We should begin to see more interesting trading patterns, and if we get a correction that sets the flight to quality in motion for the bond market to rally, then we may indeed be preparing for a Phase Transition into 2017.
Keep in mind, banks want to see cash eliminated. That will prevent bank runs, as they see it. This will mean that the ONLY place to put cash will be outside of the banks, and it is in that atmosphere that we may yet see the Phase Transition in the stock market into 2017.
This is not going to be a walk in the park. We are going to have to follow the trend and let the chips fall where they may. Clinging to old theories will only cause losses at this stage in the game.
We appear to be entering into territory, unseen for hundreds of years. This is not a Great Depression scenario; this is a lot more difficult to deal with. Equities have remained steady due to capital inflows. Domestic retail investment remains at record lows. The future will be the decoupling of stock prices from earnings because we are dealing with capital preservation. Those who constantly harp on the overpriced stock market would imply, “Buy bonds!” That is the opposite side, but rates are nothing to negativity. Of course, you will have those who will yell, “Buy gold!”, but that is still a tiny fraction of the world economy. Even equities are grossly underweight within the world economy compared to debt. That is where the BUBBLE really lies, and that is where we focus our attention. The traditional calls to sell stock are the same old reasoning that has existed in a Public Wave. This is what happens when confidence collapses in government. It is a complete new game.

Judiciary. Market crashes.

Flash Crash Prosecution

April 28th, 2015
Martin Armstrong
2010-Flash Crash
The latest pretend prosecution for the 5-year-old Flash Crash of 2010 illustrates just how corrupt New York really is. They ONLY criminally prosecute people who are not from New York. The Madoff case blew up in their faces after countless warnings that there was a fraud reported by many in the industry, which they all ignored because it was New York City – The Promised Land Above the Law.
The CFTC and others have to justify their very existence by prosecuting anyone other than a New York banker, for they are simply off limits. As the saying reflects the true nature of the legal system in New York City – you do not shit where you eat. The lawyers always remark that those who work at the CFTC are the rejects from the SEC. They are more interested in protecting the main players to get one of those special jobs as a reward for their protection. Many articles have appeared about the “revolving door” at the SEC. The WSJ, Huffington PostCNBC, have all reported that this “revolving door” prevents enforcement, yet Congress protects the regulators who protect the banks – their main political contributors.
Cohen Alan
Firms routinely hire from the SEC and CFTC, and that makes those agencies mindful that you cannot bring a case against the big houses, or your career is toast. No law firm in NYC will hire someone who has prosecuted a major client. This is just how the regulators are kept in check. In our case, Goldman Sachs hired the court receiver Alan Cohen, who continued to run Princeton Economics even from the board of directors at Goldman Sachs.
The corruption in New York City is neck deep, and here comes another bogus prosecution to pretend the regulators actually do something for their pensions. Now a 36-year-old futures trader, Navinder Singh Sarao, who operated from his London-area home will fight extradition to the United States on criminal fraud charges wildly claiming that he had helped set off a huge crash in the United States stock market, known as the Flash Crash in 2010. The government admits that he was not the sole trader. They will not charge any bank for trading in the same manner, but they will charge an individual trader to PRETEND that they are vigilant in protecting the public. This is just total nonsense and that chart above proves the CFTC and the Justice Department are way off base.
My advice to Sarao is straightforward. Subpoena all trading records for that day at the CFTC to see who had what positions and what they did. You have to demonstrate that you were nothing in the mix of things. These people will never allow Sarao to have a real lawyer from outside of NYC. Stay away from NY lawyers, for they will never jeopardize their own business in town for a client. The government will freeze all his funds to make sure he gets a court appointed counsel who has a 99% near perfect track record of losing every case. Their job is not to defend clients, no matter what bullshit they tell you.
It appears that Sarao is the scapegoat. The government first claimed an automated sale algorithm at a mutual fund, widely identified as Waddell Reed, caused the crash. There was no mention of Sarao in the report, and there was no mention an unidentified individual trader that could have even been Sarao. That investigation should be subpoenaed immediately. No court appointed lawyer would dare ask for such a thing. The government naturally wants to prevent any real lawyers from interfering so that they can have control of the case and ensure they do not look like fools. Court appointed lawyers are absolutely clueless in international finance or markets, besides the fact that they maintain a 99% track record of perfectly throwing cases for the government to win. They are NOT about to bite the hand that feeds them. Typically, the court appointed boys are the misfits who cannot find a job otherwise.
The commodity broker is normally the government’s star witness to keep their license. Anything they say will be questionable. Already the Chicago broker RJ O’Brien, who cleared the trades for Navinder Sarao, has said the firm, “had no involvement in the trading decisions” of the trader, who had previously traded with MF Global. The spokeswoman added that RJ O’Brien, “had no involvement whatsoever with the individual or his company at the time of the Flash Crash in 2010 or for several years thereafter.” His account was with the notorious MF Global. Here we have a firm that stole clients’ money effectively, who was then granted a get out of jail free card by Obama. Now Corzine wants to start a hedge fund. They could show up as government witnesses. If so, subpoena the entire investigation into MF Global. But again, a court appointed lawyer will never do that either.
Aaron Watkins, representing the United States government, requested that bail for Sanao be denied because of the gravity of the charges and the potential prison time he faces. The course is to monitor all his communications and to deny him the right to defend against charges that are stupid, at best, and a cover-up if exposed in the light of day.
The CFTC and the Justice Department are accusing Sanao of wire fraud, commodities fraud, commodities manipulation, and spoofing, a form of market manipulation that is a new theory yet has been standard practice for decades. Prosecutors contend that Sanao made £26 million pounds, or $40 million, in illegal profits over four years. That is obviously not limited to the Flash Crash.
The British Judge showed the world how bad the justice system really has become, even in Britain. The judge granted bail at £5 million pounds, and made his parents put up £30,000. On top of that, his parents had to surrender their passports, as well as his two brothers. The judge effectively restrained his entire family for just being related to Sanao. When it came to putting up the family home as collateral, the judge, showing his bias if not racism, joked about the importance of a “family home”, asking where the other £26 million might be. He took a jab at Mr. Sarao that he could buy something “even more lush than Hounslow” which was aimed as a slur because they lived in a modest area for the reputation of his neighborhood, which is next to Heathrow Airport. That only raises the question: If Sanao made so much money, why did he not increase his living standard?
Part of the game the government always plays is to slander the individual, in an attempt to paint him as a greedy capitalist, relying upon hating the rich to convict him. They state in the criminal complaint that a month before the Flash Crash, Mr. Sarao set up a corporate entity in the Caribbean island of Nevis, calling his firm Nav Sarao Milking Markets. He was not working in an institution, nor did he have insider information. He was trading for himself as a small individual.
In the criminal complaint, Mr. Sarao is accused of entering and withdrawing thousands of orders, worth tens of millions of dollars, on hundreds of trading days to push down the price of futures contracts tied to the value of the Standard & Poor’s 500 index. This is what they are calling the practice of “spoofing”, but offer no evidence that they had any such impact.
Prosecutors contend that on the day of the Flash Crash, May 6th, Mr. Sarao placed large orders repeatedly over several hours, leaving the market vulnerable to big moves when another big trade would come in. They CANNOT prove that such orders did anything. That is all a matter of liquidity, and that is the culprit, for to this day liquidity is still off by 50% from 2007 levels.
This new claim that “spoofing” is manipulation is really bogus. That would be standard in trading on the floor all the time. We would call them “flash” bids or offers. Some traders were famous for it. They would quickly offer 1,000 lots to buy or sell and look away. It was not manipulation, for people would just not really pay attention. In fact, I would instruct my floor brokers to wait silently and pay attention to one of these types, and as soon as he would try a flask offer, buy it. In the 1980s, I took on one such traders and bought three 1,000 lot offers in gold in a row. The market then rallied like hell when they saw the flash boys met their match.  So if we want to call it “spoofing” – fine, but it has been going on for as long as I have been in the business. It would never be manipulation that was sustainable, for the market never departed from its broader trend in any event.
2010-Flash Crash-w
During the crash in May 2010, the Dow fell nearly 600 points in a matter of minutes. Yet we can see that the Flash Crash was perfectly within the bounds of normal market movement. True, this event rattled individual investors and institutional investors alike. Regulators have struggled to piece together what happened, offering up various explanations, many of which have been contested. Although the major indexes recovered the losses and moved to new highs rapidly, the government does not understand the mechanism behind the Flash Crash and think this will save face. Obviously, the exchanges and regulators cannot police the markets, for they do not understand how they function to start with. They proceed upon the same theory of Marx – that the business cycle can be defeated.

Monday, April 27, 2015


When it Rains – Pours Oil


A major new discovery of oil has been made in Britain by Gatwick airport (as reported by BBC). They appear to have discover about 100 billion barrel supply of oil ONSHORE in Britain. The North Sea Oil has produced 45 billion barrels in the past 40 years. This may be significant for Britain.

CRUDE-Y 1-1-2015

While an annual closing below $41 will be bearish and an annual closing below $31 will be profound, an annual closing BELOW $25 will be devastating to the long-term prospects for crude oil. That would suggest that in real terms (adjusted for inflation) we are not likely to see that exceeded for at least 26 years and perhaps more like 37 years.

GC-1982 Dollars

This would be similar to what took place in gold from 1980. That high in REAL TERMS has still not been exceeded even during the rally into 2011. Hence, the discovery of oil in Britain and elsewhere appears to be in line with the long-term cycle. For now, this is feeding into the deflationary cycle currently in motion.

Creating Market Depth: The First Step in Creating an Economy

Posted on April 27, 2015 by 
Exchange at Amsterdam
Some people have difficulty rationalizing selling something they do not yet have. Of course, nobody complains when they buy contracts in the future’s market, but have no intent of actually taking delivery. This entire line of thinking has been so distorted, particularly by those who claim “paper gold” has suppressed the price of physical gold. Those same “paper gold” contracts are also what pushed the price up in 1980 and into 2011. Nobody complains about buyers. The first step in understanding anything is to be objective, not slanted to one side.
The futures exchange is what provides DEPTH to any market, and makes even the production of the commodity or farming secure KNOWING that they can sell the item into the free market. Aristotle called brokers, “Men who made money from money.” True, they changed the villa economy into a market economy. They approached farms and told them to produce more than they needed for themselves to sell it overseas. They transformed Athens into the financial capital of the western world.
There has to be a common market – a place where things are exchanged. This extended into ancient times and provided the first step in creating a civilization – people coming together for a common cause. It has been this narrow thinking process that lead to authoritarianism, if not communism. We see the same craziness erupt in the stock markets. Governments have often outlawed short selling and the market has fallen even more. Why? It is the short player who has the courage to buy during a panic, for he is taking a profit.
Understanding the vital necessity of allowing two sides to a market is critical. For if we do not understand that aspect, then we will always seek to blame others because we do not understand the existence of the business cycle. Shorts were not dominant in Japan, nor in the U.S. share market collapse during the crash from 1929. Without a two-sided market, producers cannot raise capital to fund their operation be it cultivation or mining. Buyers need liquidity. They need to have confidence that if they buy something, they can raise money when they need it if necessary. With a functioning market, then and only then will there be buyers and sellers in a sufficient quantity to facilitate planting or mining. Without a deep market, it is risky to produce anything if there is no common place to trade. Only those who buy and lose will naturally blame shorts. There are many other factors that come into play.
It was the first exchange place in Amsterdam that enabled Europe to expand its economy. Insurance was developed and many traveled to Amsterdam to buy insurance for a voyage that then facilitated international trade. There must be a central place to trade; without that, there will be no market economy and the Dark Age will prevail.
We absolutely NEED shorts to bring depth to the marketplace. It is only with that depth that production will be stimulated. If you cannot freely sell something, then you cannot have an economy emerging from a civilization, which is the collective capacity of everyone coming together in a common bond.

Wednesday, April 22, 2015

19 year cycle is the realignment of the sun, moon, and the earth when they return to the same point

The 19 Year Cycle

The 19 Year Cycle curiously suggested by Jefferson shows up as another layer within cycle theory. This was the basis for both the ancient Hebrew and Babylonian calendars. The concept of a “leap” year was rather simple to understand. The Julian calendar was a direct calendar to measure time by solar cycles. The Hebrew and Babylonian calendars kept track of the sun by using the moon. The moon cycle was 19 years amounting to 228 months but it requires 235 months to equal a 19 year solar cycle. Adding these 7 months was rather arbitrary. The modern Hebrew calendar inserts the 7 months in an orderly fashion one each during the 3rd, 6th, 8th, 11th, 14th, 17th, and 19th years of the cycle. This was actually not done until 360AD. The point of this 19 year cycle is the acknowledgement that the moon, sun and earth return to the same position in this triad once every 19 years.
There is also the periodicity and recurrence of eclipses that is governed by the Saros cycle, which is a period of approximately 6,585.3 days (18 years 11 days 8 hours). It was known to the Chaldeans as a period when lunar eclipses seem to repeat themselves, but the cycle is applicable to solar eclipses as well.
There is a cycle to absolutely everything. The 19 year cycle is the realignment of the sun, moon, and the earth when they return to the same point in their relationship. It will show up in economics every so often like the 19 year bear market in gold from 1980 into the 1999 low.

Monday, April 20, 2015

The Federal Reserve Part IV – The Bankers Strike Bank

Posted on April 20, 2015 by 

Volcker Paul - 1

Paul Volcker Former Fed Chairman

The entire theory of how to manage an economy via the rise and fall of the money supply being the sole cause of inflation or deflation, was really discredited post-1971 with the birth of the Floating Exchange Rate System. Unbeknownst to the vast majority, the entire accounting system of trade had been constructed upon the Bretton Woods system. There was no need to actually count the number of Toyota cars coming in at the dock, for all you had to do was count the dollars in and out and that under a fixed exchange rate mean more or less goods. This short-cut made sense with fixed exchange rates, but not when currency fluctuated.
The 1970s produced rising prices (inflation) but declining economic growth, which became known as STAGFLATION. This was a cost-push type inflation whereas OPEC sent oil prices soaring so the costs rose dramatically forcing prices to rise even in recession. Therefore, it became possible for inflation to now rise without an increase in money supply or even consumer demand. The consumer post-1976 responded by purchasing goods now to save money tomorrow much as the consumer rise in spend in Tokyo ahead of the implementation of taxes. Likewise, real estate sales will typically rise when the consumer begins to see mortgages rates rising, not falling. The consumer responds to the trend in motion.
Raising interest rates to fight a mixed type of inflation only sent the government spending into hyper-drive because it was on automatic pilot. Congress was expecting the Fed to control inflation, but meanwhile, government budgets increased per department for they had been indexed to the CPI. President Jimmy Carter required the adoption of “Zero-Base Budgeting (ZBB) by the federal government during the late 1970s. “Zero-Base Budgeting was an executive branch budget formulation process introduced into the federal government in 1977. Volcker tried his best, but all he could do is stop the consumer speculation. He had himself delivered a lecture in 1978 he entitled the Rediscovery of the Business Cycle.
M1USA-Y 4-20-2015CPIUSA-Y 4-20-2015
No longer were departments required to set for a budget each year and have it approved by Congress. This new Zero-Base Budgeting process meant that whatever they spent the previous year would be automatically renewed indexed to inflation. This further created the now standard practice of just wastefully spending whatever they had remaining just so they would not be cut the following year.
The entire landscape was altered in how government now fit into the economy. It became impossible for the Fed to control inflation. As you can see, despite the recession 1974-1976 and 1981-1985, both the CPI and money supply kept rising. There was a total disconnect from the traditional economic theories and the view that the Fed was in the driver seat was just not realistic. The entire fate of the economy was not on a new paradigm of economic interaction.
This would be a leading cause of the 19 year decline in gold and the complete discrediting of the old-world view of inflation and money supply punctuated by the claim that paper money was fiat. The floating exchange rate system ended the concept that money had to be tangible freeing it to move according to the worth of the people and their total productive capacity. This changed everything and then Carter’s Zero-Base Budgeting created an automatic-pilot process that nobody understood just how it would alter the behavior of whole departments. It was Adam Smith’s Invisible Hand inside government – spend it or lose it.
The global economy was changing taking a giant leap forward in economic reality. This decoupling of money from the concept of a barter system where it had to be some object between two other objects, Japan soared to the second largest economy in the world without old or natural resources. They proved the new era was here – the dawn of money that reflected the capacity of the people to produce distinguishing a skilled and educated society from those that were still primitive. This had also a profound impact upon the commodity industry and its take over of Wall Street that began precisely with the ECM peak of the 51.6 year wave 1981.35.


The company known at first as Philipp Brothers was founded in 1901. It was later acquired and became the Philipp Brothers Division of Engelhard Minerals & Chemicals Corporation, the major gold refiner in 1967. In 1981 the company was spun off as Phibro Corporation, and that same year the company subsequently acquired Salomon Brothers, creating Phibro-Salomon Inc. Phibro Energy, Inc. was established in 1984, absorbing the oil department of Philipp Brothers. The rather famous connection of Marc Rich (1934 – 2013) and PhiBro was due to the fact that he worked with Philipp Brothersbut left the firm in 1974 to set up a Swiss operation known as Marc Rich & Co. AG, which would later becameGlencore Xstrata Plc.. Rich was indicted for tax evasion and never returned to the USA staying in Switzerland. Bill Clinton not merely repealed Glass Steagall for Goldman Sachs, he also granted Marc Rich a controversial pardon.
In 1981, commodity trading firm, Phibro Corporation acquired Salomon Brothers which was founded in 1910 by three brothers (Arthur, Herbert and Percy) along with a clerk named Ben Levy. In 1978 John Gutfreund rose as the head of Salomon Brothers which had remained a partnership. Gutfreund was now selling the firm to the huge commodity firm Philips Brothers of Marc Rich fame, known as Phibro on the street. This takeover was right in line with the major high on the Public Wave that peaked at 1981.35,
PhiBro were great traders coming from the commodity markets. They had conquered the world in 1980 shorting gold and silver, and thus were now trying to buy Salomon Brothers when they were at the top of their cycle. Gutfreund became a co-CEO with Phibro’s David Tendler. The currency swing following 1981 was dramatic from a percentage basis. Neither PhiBro nor Salomon Brother comprehended what was going on internationally regarding capital flows. They got caught in this new pendulum swing with extremely high volatility. The commodities crashed and burned, and the tables were turning. This shifted the profit base from PhiBro now to Salomon Brothers. Gutfreund now seized control and started to expand the firm into the currency trading, and enlarged the firm’s positions in underwriting and share trading. Salomon Brothers was now also trying to expand into Japan as well as Germany and Switzerland.
The firm that had risen to such heights, known as the “King of Wall Street” saw its profits peak precisely with the 1985 turn in the Economic Confidence Model at about half-billion dollars. The markets all turned in 1985 with the dollar crashing, commodities starting to rise and the stock market exploding. The fixed income specialists at Salomon Brothers were now in a bear market. Salomon had expanded right at the top in 1985. They had increased their staff by 40%. So as it was PhiBro’s turn at the 1981 turning point, it was now Salomon’s turn with the 1985 target.
Salomon Brothers was the powerhouse of Wall Street banking – the bond dealer extraordinaire. It was founded by Arthur, Herbert and Percy Salomon. The brothers began with $5,000 and some help from their father’s (a broker himself) clerk and opened their first money brokerage office on Broadway near Wall Street. They made their fortune selling US debt during World War I. Unlike Goldman Sachs, Salomon Brothers was conservative and weathered the Great Depression rather well avoiding get caught up in all the speculation of a permanent new era.
Under the new leadership of the family’s next generation, William (Billy) Salomon, the firm expanded its operations in the 1960s, adding a research department the infamous economist Henry Kaufman. They expanded into underwriting activities and  block trading joining Lehman Brothers, Blythe, and Merril Lynch in the field of Investment Banking where they became known as the ‘Fearsome Foursome.’
John Gutfreund joined Salomon as a statistics trainee in the mid-1950s,  and per request of Billy Salomon, Gutfreund became his golf partner. It was this friendship that allowed Gutfreund to quickly climb the corporate ladder at Salomon Brothers. He was named partner at the young age of 34 and then took over the firm at 49 becoming the CEO.
According to Michael Lewis’ Liar’s Poker, Gutfreund was known to tell his employees that “a trader needs to wake up every morning ready to bite the ass of a bear.” The arrogance was astonishing. The power clearly went to their heads for the famous line from Lewis’s book that lives on, was what they called themselves - “Big swinging dicks.” Yet the idea of creating first private mortgage backed security actually began there at Salomon Brothers during the 1980s.
Solomon Bros Bonfire of Vanities
This was the era of the Bonfire of the Vanities is a 1987 novel by Tom Wolfe which captured the decline in ethics and morals in New York City at the time. .The competition between Goldman Sachs and Salomon Brothers was always there. Goldman was not part of the ‘Fearsome Foursome’ but was determined to break back into the center of the era.
When PhiBro and Salomon were joining at the hip, Goldman began looking around to follow in the footsteps of this merger. They too wanted commodity exposure and bought the trading house of J. Aron that was clearly a competitive move given the Salomon Brothers merger with Philips Brothers. J. Aron was an old commodity house that began in New Orleans in 1898; it moved to New York City in 1910 in time for the commodity boom with World War I. The firm was named after Jack Aron who was part of the Jewish community. J. Aron expanded into the metals trade during the late 1960s after gold became a free market in London and the official line was that there was now a two-tier pricing in gold as of 1968. During the 21.5 year commodity boom, J. Aron rose from a capitalization of less than $500,000 in the late 1960’s to $100 million by the peak in 1981. By the peak, J. Aron had become the largest trader in gold doing more volume in dollars than the biggest of any of the Dow stocks.
Being a commodity firm, J. Aron was actively trading currency futures that the
banks did not understand. They were the first to arbitrage the currency futures against the cash currency markets for the commercial banks which back then did not understand the markets, but had to provide that service to keep commercial clients.
Aron’s business in precious metals helped to bring in market-share. This is the beginning of gold lending. Banks holding gold would start to lend it to J. Aron at 0.5%. This was a business that was starting to explode. After the whole 1980 Commodity Boom, everyone expected it to rebound and keep going. Oil hit $40 and gold $875. Everyone wanted to become a commodity trader for the Dow Jones had kept bouncing off 1,000 so why not go where the action was.
It was October 1981 when Goldman Sachs purchased J. Aron & Co, for $135 million. It was in fact the top of the commodity market. Although they had bought the high, they were importing the commodity culture of trading that would in fact lead to the firm’s trading reputation. Its current head, Lloyd C. Blankfein, came from J. Aron and has now focused Goldman Sachs as a mean, lean, trading machine.
Fowler Sec TreasIt was this competition between these two Jewish firms that fueled the evolution
process of Wall Street. Leading up to 1980, Sidney Weinberg (1891-1969) at Goldman Sachs brought in his heir that perhaps began the desire to cultivate contacts within government. It was 1968 when Henry Fowler (1908-2000), former Secretary of Treasury, was recruited. It was Fowler who opened those political doors in a host of different nations yet it was Gus Levy (1910-1976) who was the aggressive one pushing the firm into taxable bond dealing expanding from commercial paper. From 1969, Goldman Sachs now moved into the bond market.
Salomon Brothers was taking market share away from Goldman Sachs. The decision to get back into proprietary trading appears to have been from Steve Friedman and Robert Rubin to be competitive with Salomon. Goldman Sachs was still hesitant sitting to a large extent watching trading profits grow at Salomon, and that was the trend at Morgan Stanley, First Boston, and of course Merrill Lynch.
The October 1981 takeover by Goldman Sachs of J. Aron & Co altered the culture within the firm. From that point onward, Goldman would also drift toward becoming a lean, mean, trading machine bent on proprietary trading.
It was the 1987 Crash that first hit Salomon Brothers where it hurt. Traders scalping markets never see the big changes in trend until it its them in the face. Warren Buffett now enters the scene. Salomon turned to Warren Buffet to inject $700 million. Their traders lost big time. Buffet wrote in that year’s letter to his investors:
“By far our largest – and most publicized – investment in 1987 was a $700 million purchase of Salomon Inc 9% preferred stock. This preferred is convertible after three years into Salomon common stock at $38 per share and, if not converted, will be redeemed ratably over five years beginning October 31, 1995. From most standpoints, this commitment fits into the medium-term fixed-income securities category. In addition, we have an interesting conversion possibility.”
That investment turned into a long relationship full of ups and downs, but it also saw Buffett also turn into the commodity game of manipulation and wild trading. At first, he assumed it would be his typical classic Buffett play. Sunday, Sept. 27, 1987, Buffett met with John Gutfreund, then Salomon’s chairman and CEO, and agreed that Berkshire Hathaway would buy $700 million of Salomon convertible preferred stock, which equated to a 12% stake in the company. Buffett invested in what appeared to be a solid company with a good reputation that was getting its stock slapped around by a fearful market following 1987. Buffet would later say: “Be fearful when others are greedy; be greedy when others are fearful.”
Buffet quickly found himself in the midst of turbulent trading where he was not accustomed to really valuing speculative positions on a trading desk. Within weeks Buffett was stunned by Salomon’s sudden surprise disclosure of a $70 million write-down from bad bets made by trading junk bonds. That hidden trading loss wiped out one-third of Mr. Buffett’s investment.
Salomon was not alone. Kidder Peabody also starting with the 1987 Crash was plagued by scandals, including insider-trading cases involving head of mergers Martin Siegel, head of arbitrage Richard Wigton (charges were later dropped) and trader Joseph Jett. While a judge originally found Mr. Jett not guilty of securities fraud, in 2004, the SEC reversed that decision and upheld the charges. In 1994, parent company General Electric sold Kidder to Paine Webber for $70 million.
This trading atmosphere of “Big Swining Dicks” had not learned its lesson from the 1987 Crash. This was the culture instilled by PhiBro from the commodity side of the world. Trader Paul Mozer who had a 12-year career at the firm coming from Morgan Stanley, allegedly submitted illegal bids for U.S. treasury securities in August of 1990, attempting to corner the market by purchasing more than the 35% share allowed per individual transaction. Yet what he eventually plead guilty for was only two transactions in the 5 year notes on February 21, 1991 for $6 billion that was $2 more than the bank was allowed to buy. The plea did not match the events.
Other Salomon employees would later tell the NY Times they were shocked for: “This was not driven by personal gain, if this is true. There’s a game here. And it was a desire to win the game.” Mozer’s supervisor, John Meriwether who started and blew up Long-Term Capital Management in 1998 requiring a Fed bailout the trader with a position of nearly $100 billion. Meriwether claimed to have chastised Mozer for the bid when it came to his attention, but he did not fire Mozer raising serious questions about the trading culture overall inside Salomon Brothers.
Shortly before the Salomon Bros. scandal erupted, Paul W. Mozer seems to have been aware that the Treasury knew about the trade and there would be ramifications. Before the announcement by Salomon Brothers on August 9, 1991, Mozer then sold about $1.7 million worth of Salomon stock, which was about 46,000 shares. the firm confirmed. The government froze the funds for it smelled like insider trading in the real sense.
Salomon Brothers and Mr. Mozer’s lawyer said that Mr. Mozer had offered to reverse or rescind the sale. Salomon’s stock price sank sharply after the scandal was revealed. Mozer’s lawyer denied that any violation of insider trading laws had occurred. To this day, Paul Mozer is entirely omitted from Wikipedia – very strange and it tends to suggest that he was by no means acting alone.
Corrigan Edward Gerald  (born 1941)The President of the NY Federal Reserve at that time was NOT in the pocket of the bankers. The Fed sent a letter that was pointed and demanding. The letter was signed by an executive vice president of the bank, but it was clear, Edward Gerald Corrigan (born 1941), was pissed off and stood behind every word. Corrigan by then knew enough to have become incensed by these doings on his watch. The letter said that Salomon’s bidding “irregularities” called into question its “continuing business relationship” with the Fed and pronounced the Fed “deeply troubled” by the failure of Salomon’s management to make a timely disclosure of what it had learned about Mozer.Corrigan demanded a comprehensive report within ten days of all “irregularities, violations, and oversights” Salomon knew to have occurred. The real interesting factor that demonstrated the more-likely-than-not involvement of of everyone right up to Gutfreund, was the fact that Gutfreund failed to inform the Board of Directors including Buffett that the Fed had even sent such a letter.
John H. Gutfreund, Salomon’s chief executive; Thomas W. Strauss, the firm’s president, and John W. Meriwether, the vice chairman, were all forced to resign after Salomon disclosed it made a series of improper bids at several Treasury auctions. All three executives were told of Mr. Mozer’s illegal bids but waited months before they relayed the information to the Treasury Department. It was at least plausible that this was just part of the “Big Swinging Dicks” culture at Salomon where anything goes.
Paul Mozer, the alleged central figure in the Salomon Brothers Treasury bond scandal, first agreed to a ple deal on January 8th, 1993. Then the plea fell apart on January 12th suggesting he was really unwilling to take the fall for everyone. Mozer finally pled guilty after being greatly reduced. He told U.S. District Judge Pierre N. Leval on Thursday, October 1st, 1993, that he made false statements to the U.S. Treasury and Federal Reserve Board investigators. Mozer faced a maximum of 10 years in prison and a $500,000 fine.  Mozer then entered a cooperation agreement to rat on Wall Street and what really went on in Salomon Brothers resulting in the resignations. Mozer was sentenced to only 4 months probation. At sentencing, his lawyer told the court that Mozer had provided extensive information about the practice of “illegal manipulation of the Treasury bond market that led to investigations of Salomon, Goldman Sachs, Daiwa Securities and several Japanese investors”. (see Assassociated Press December 14th, 1993)
Salomon Brothers was fined $290 million for this infraction. The firm was weakened by the scandal and August 18th, 1991, the U.S. Treasury first banned Salomon from bidding in government securities auctions. It was then when Warren Buffet appears again offering to take the helm. The Treasury agreed and rescinded the ban. In the four hours of suspense between the two actions, Buffett struggled passionately to protect his investment for the firm, valued at $9 billion, would have been out of business and most likely would have had to file immediately to file for bankruptcy.. That action also seemed to reflect that Mozer was a fall guy, and the problem was the culture at the firm – not one individual. This is probably why there is no Wikipedia page appears on Mozer – very strange.
Salomon was deeply involved in the bond trading scandal from top to bottom. The firm was nearly forced to file for bankruptcy as clients fled based on the rumors the Treasury would shut them down. In order to protect his investment, Mr. Buffett went from being a passive investor to chairman of the firm. He found that every dollar of shareholder equity was supporting $37 of assets. That’s even higher than the 30-to-1 leverage ratio at Lehman Brothers when it collapsed.
Mr. Buffett became Chairman of Salomon Brothers and ran the firm for nine months. He later claim that his time there was “far from fun” in a letter to investors in his Berkshire Hathaway holding company. However, Buffett was somehow converted to the culture. The first time his name was being bantered around associated with a silver manipulation was 1993. The CFTC walked into PhiBro and demanded to know whoo their client was. PhiBro refused to tell them and the CFTC ordered them to exit the position.
In 1997, Salomon was sold to Travelers for $9 billion. Yet strangely enough, The sigh of relief could be heard all the way from Mr. Buffett’s hometown of Omaha. His $700 million investment was now worth $1.7 billion. But the experience seemed to sour him on Wall Street deals. By 2001, he had exited his investment in the firm.
SV1997-W 1997 Buffet Manipulation
Buffett’s name was again being bantered about in 1997 with regard to silver. Once again the player involved was PhiBro. People judge others by themselves. As a result, the NY crowd began to realize that I was always on the other side of the classic failures. Instead of considering that perhaps our model was better than they they could produce with all their machinations, they took the position that our firm was just too influential. I had testified before Congress in 1996 and we did have about half the equivalent of the US national debt under contract for corporate advisory. They translated that into influence and assume their failures were my successes since 1987 and that was simply due to influence.
Based upon this view of influence, they desperately tried to get me to join the second silver manipulation with Buffet. I have written stating publicly that PhiBro’s brokers walked across the COMEX pit floor and showed my floor brokers Buffett’s orders and told me to join. They knew I would never trust these people for how would I know I was not the patsy to buy and they would use a another seller on the other side of the ring. I would never join them. Hence, PhiBro showed me the orders to convince me to join.
NYSILV-D 4-3-1997
Silver-TradeSo why did PhiBro show me the orders? Yes, I was a big trader looking for the low in 1999. I would often go head to head with them for they traded on manipulation and I traded by time and price.
In the movie, Barclay Lieb states that before he came to work for me, he called Goldman Sachs and they admitted they had thought they could“crush” me, but usually I won. The Club was actually planning their manipulation earlier in the year. The cycles were NOT in their favor so I took them on. They tried their best to manipulate the market but the Wall Street gods were not smiling that day. On April 3rd, 1997, it was I who crushed them. They lost. The floor went nuts. They said they never saw trading like that day. It was like stepping in the ring as a light-weight and you knocked out Mike Tyson in one punch. You cannot manipulate against the trend. I proved that standing my ground that day. This was why they then gave up and wanted me to join. Perhaps that first attempt to manipulate silver sent them to solicit Warren Buffett to take me on since in the end, he spent $1 billion to buy silver for that move.
After PhiBro showed me the orders, I then reported to our clients “they are back” knowing it was Buffet and PhiBro for a second time. They all got pissed-off at me even though I never mentioned names. The buying of silver was done in London. Therefore, they moved silver out of COMEX warehouses in USA and shipped to London to pretend there was a shortage to justify the manipulation. The Wall Street Journal assisted in the rally.
The manipulators with steering the buffet buying in London to avoid the 1993 problem with the CFTC. This is why AIG trading arm also set up in London.
Buying silver in London justified moving it from the NY COMEX and this allowed them to get the manipulation going. COMEX supplies were reported in isolation. Moving the silver to London created the false image of a shortage to justify thye higher prices. The Wall Street Journal was used to plant the story. 
On September 30th 1997 the stories played headlines – “Silver Prices Hit Six-Month High On Steadily Declining Reserves, By  PALLAVI GOGOI AP-Dow Jones News Service Updated Sept. 30, 1997 12:01 a.m. ET NEW YORK — Silver futures surged to a six-month high at the Comex division of the New York Mercantile Exchange, a move analysts said was triggered by steadily declining warehouse stocks. The rally was boosted by preplaced purchase orders around the $5-per-ounce level…” This was the news created for the manipulation that was constantly played out in the newspapers. The Wall Street Journal again reported on November 17, 1997, “Silver Futures Prices Leap On Hints of Tight Supplies”, and again on December 4, 1997 the Wall Street Journal from London reported “Silver Surges on Strength In Supply-Demand Status By NEIL BEHRMANN Special to The Wall Street Journal Updated Dec. 5, 1997 12:01 a.m. ET LONDON — Gold may be in the doghouse, but silver is soaring like a bird”. The reporting of shortages continued to fuel the rally. The Wall Street Journal reported again December 24, 1997 for the manipulators “Silver Futures Advance As Inventories Plunge”
We kept track of what the “club” was doing and warned our clients whenever their antics were conflicting. One of the big ones that blew the lid off, was again silver. In 1997, I warned that silver was going to rise from $4 to $7 between September and January 1998. I was even invited to join them, and told to stop fighting, and put out false forecasts. I declined. Their strategy became insane.
Walters-AlanAt first, a friend of mine who had been Prime Minister Thatcher’s economic adviser became a board member of AIG in London – Alan Walters. He called one day and asked if he could drop in to Princeton the next morning when he arrived from London. I naturally said OK. To my surprise, he arrived with the head trader from AIG London who then proceeded to try to convince me to stop talking about the manipulations. I told him I would not ever reveal any names, and the government didn’t care anyway.
Things got insane thereafter. An analyst on the payroll of PhiBro had a main contact at the Wall Street Journal. They decided to slander me and get the press to target me claiming I was trying to manipulate the market. It was an interesting strategy, but one I cared nothing about since I was primarily a institutional and corporate adviser, and they were not really interested in silver.
The journalist from the Wall Street Journal called me. He accused me of this nonsense and we argued. It got quite heated. He said if silver was being manipulated, then give him the name. I told him he would not believe me anyway. He demanded the name and so I said fine, go ahead, let me see you print it, knowing he never would. The name I gave him was Warren Buffett. He laughed. Told me everyone knew Buffett did not trade commodities I told him that was how much he knew.
The Wall Street Journal published the article. The London newspapers were fed stories by the “Club” that I was now the largest silver trader in the world. This became all a joke to me. Even the CFTC could look at positions and knew I was not a big player in silver on that move.
The mistake made by the “Club” by turning out the press against me, was they actually created such a worldwide story that the CFTC was forced to call me. They knew I was not the source. They asked me, where was the manipulation taking place? I told them it was in London, out of their jurisdiction. They told me that they could pick up the phone and find out. I told them that they had to make that clear decision. I hung up. Never did I expect that they would really do anything.
A few hours later, my phone rang. It was a good source in London who also was helping to monitor the “Club” actions. He told me that the Bank of England had called an immediate meeting of all silver brokers in London in the morning. I was shocked. The CFTC had made the call. But then again, I had given them no names so perhaps in their mind, this was fair game.
Within the hour, Warren Buffett made a press announcement. He admitted he had purchased $1 billion worth of silver, in London . He denied he was manipulating the market. Claimed the silver was a long – term investment. Everyone was shocked that Buffett was suddenly exposed as a commodity trader after all the next day, the wall Street Journal called me. The writer asked – “How did you know?” I told him it was my job to know! Silver thereafter declined and made new lows going into 1999. So much for the long-term investment.
The time line of this head-to-head confrontation was AFTER the Treasury Scandel of 1991. Clearly, Buffett developed some relationship with PhiBro. In 1993, Phibro Energy, Inc. became the Phibro Energy Division of Salomon Inc. It was renamed to simply “Phibro” in 1996, and in 1997, Salomon was acquired by Travelers Group, which merged with Citicorp to form Citigroup in 1998. With the merger, Salomon became an indirect, wholly owned subsidiary of Citigroup. So obviously the silver play was in the fall of 1997.
Phibro came to the notice of the general public only when its leader, Andrew J. Hall reportedly was seeking a $100 million bonus from Citigroup, which had been bailed out by U.S. taxpayers in 2009. Reportedly Phibro was the main source of the $2 billion in pretax revenue Citigroup received in commodities trading. Hall’s position was rather clear. He had nothing to do with the mortgage backed security debacle.
In October 2009, Occidental Petroleum announced it would acquire Phibro from Citigroup, estimating its net investment at approximately $250 million. Phibro is now part of Oxy’s “Midstream, Marketing and Other segment”, which includes Oxy’s gas plant, pipelines, marketing, trading, and power generation operations. Hall continues to run Phibro and also heads Astenbeck Capital Management, of which 80% is owned by Hall and 20% by Occidental.
Reverse Takeover of Government


The repeal of Glass-Steagall Act, also known as the Banking Act of 1933 (48 Stat. 162), which was to prevent the very thing that Goldman Sachs was involved in during the Great Depression where the stock in Goldman Sachs Trading Company, crashed more than anything falling from $326 to $1.75, was intended to prohibit commercial banks from engaging in the investment business. It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression.The accusations that Goldman Sachs had engaged in share price manipulation and insider trading on contributed to the firm becoming the target of jokes in Vaude­ville.,

Friedman - StephenRubin Robert=1
Stephen Friedman and Robert Rubin took over the role of managing Fixed Income where they planned to expand into proprietary trading. Goldman Sachs moved into quantitative analysis in the late 1970s, relying still on academics. It was Freidman and Rubin who changed the culture creating the trading profit bonus and starting in 1986, Goldman Sachs began to take talent from Salomon offering a huge bonus structure and adopting the trading mentality it now acquired from J. Aron & Co.
Black Fischer SheffeyIn 1986, Goldman Sachs hired Fischer Black of Black–Scholes famous for valuing
stock options. It was Rubin who brought in Black, and the problem they had was the new embedded options within debt. But the issue they did not understand, that they were now walking into, was there is a great language problem between traders and programmers. You MUST be good at both, or you are screwed.
Goldman Sachs, the most profitable firm in Wall Street history, moved its headquarters to a new 43-story skyscraper at 200 West St. in 2010 after almost three decades at 85 Broad St.
Stephen Friedman, former CEO of Goldman Sachs, resigned as Chair of the Federal Reserve Bank of New York on May 7, 2009 Friedman was criticized for apparently at least creating an unethical image of benefiting from his role as Chair of the New York Fed branch due to the federal government’s aid to Goldman Sachs in recent months. Amazingly, Friedman remained on the board of Goldman even as he was supposedly regulating Goldman. Like Hank Paulson Secretary of the Treasury, Friedman also applied for, and got, a conflict of interest waiver from the government. Who gives out such waivers is unknown and why they are not done openly in Congress is obvious. Friedman was also supposed to divest himself of his Goldman stock after Goldman became a bankholding company, but thanks to the waiver, he was allowed to go out and buy 52,000 additional shares in his old bank, leaving him $3 million richer. Being exempt from insider trading is a government benefit. Friedman’s eventual resignation announcement came within an hour of the government’s release of the 2009 stress tests for 19 U.S. financial institutions. It was effective immediately.
Goldman Sachs, the very firm who was the worst example from the Great Depression Crash, led the charge against the trend to take over government. They installed Robert Rubin under Bill Clinton as Secretary of the Treasury. Ironically, the very firm that inspired Glass-Steagall seized control of Congress with political donations to get it overturned. This began once again the age of Transactional Banking.