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Euro Experiment: EU Bullied into $1T Banking Bonanza

Like a chess game, the bankers called 'checkmate' against the EU political leaders on Friday May 5th, 2010. Two days later in an urgently called weekend meeting the EU finance ministers hurriedly announced the biggest bailout in history.

Most people take more than two days to buy a car, but the frightened EU officials were pressured into reacting before the Asian markets opened Sunday evening. This is eerily the same scenario we saw on the eve of the US $700B TARP ratification, the Bear Stearns takeover, Fannie /Freddie Conservatorship, AIG Bailout etc.. A coincidence - Yeh right!

How was this pressure applied? Who has such power? Who won and who lost? As I explained in "Extend & Pretend: Shifting Risk to the Innocent", it is all part of the dynamic new market strategy of Regulatory Arbitrage. You had better learn how the game is played or you will be toast.

For a complete unabridged version of this article with slide presentation see: Tipping Points - Commentary

"Look at what Soros did to the Bank of England in 1992 - he went after them, they had a finite amount of dollars, he was selling sterling and taking the dollars, and they were buying the sterling and selling the dollars to defend the peg. All he had to do was sell more than they had and he wins. But he needed real money to do that.

Today you can break a country, you don't need money you just need synthetic euroshorts or CDS. A trillion dollar bailout: Goldman can create 10 trillion of euroshorts. So it just dominates whatever governments can do.

So basically Goldman can create shorts faster than Europe can create money."

Jim Rickards CNBC 05-10-10
Former LTCM General Council

Prior to the May 5th, 2010 Flash Crash where the DOW dropped a record 1000 points in a matter of minutes, I wrote in "Extend & Pretend: Shifting Risk to the Innocent" why this was going to happen. The market reacted in a perfectly predicted fashion and was the result of the same parameters that caused the 1987 record one day market drop. In 1987 it was caused by Portfolio Insurance and today it is about Dynamic Hedging (son of Portfolio Insurance). Yes, High Frequency Trading (HFT), and Dark Pools are involved, but only to the extent that they are part of the continuous refinement of the Dynamic Hedging process.

Dynamic Hedging is a key tool in applying political pressure, which is critical to the success of the three step process I will refer overall to as Regulatory Arbitrage.

The Flash Crash came on a day when the Dow was already down nearly 300 points, Greek rioting pictures were on all TV channels and the markets over the previous week had given up all the year-to-date gains. At the May 7th EU summit meeting however; it did not escape EU leaders that the sell-off the day before came with the early polls from UK elections that signaled a potential minority party win by the Conservatives. The poll results spooked the market since this and critical German elections in North Rhine-Westphalia on Sunday could potentially make EU leadership a lame duck and further spook financial markets. The EU leaders felt so forced to take action that they arguably violated (expect it to be challenged in German courts) the EU constitutional agreement.


"The EU has invoked the "exceptional circumstances" clause of Article 122 of the Lisbon Treaty to beef up the EU's balance of payments fund from €50bn to €110bn. The money can be used to bail-out countries within the eurozone for the first time. This is a "Euro Bond" by any other name, evoking the German nightmare of an EU debt union." (1)

"... a battle of the politicians against the markets. I am determined to win"
German Chancellor Angela Merkel

"...unfounded off-the-wall suggestions and speculation"
EC President Jose Manuel Barroso

"...confront speculators mercilessly ... know once and for all what lies in store fro them"
French President Nicolas Zarkozy

It is pretty scary that EU leaders felt they had to go to such an extent to demonstrate action. They were running scared due to a well crafted international banking strategy.

The pattern has become so consistent and predictable that I am able to flowchart the steps.

Let me briefly outline how the Regulatory Arbitrage strategy works. For those that may argue that international banks are not that well coordinated to implement such a strategy, then you might want to view this process in a bigger context of what modern day international banking has evolved towards, by the simple imperative of the pursuit of profit maximization and the advancement of technology. It is today's version of Adam Smith's 'invisible hand'.



I detailed in 'Extend & Pretend: Shifting Risk to the Innocent' the central elements of Dynamic Hedging, Capital and Regulatory Arbitrage. Each has a specific role to play in the process of applying pressure towards the ultimate goal of shifting risk from private hands to public hands. This risk is assumed as part of a "Risk-On" strategy via high levels of leverage to generate trading profits and investment fees. These high risk speculations which would be classified in previous years as pure speculation need to be turned into investments. The way you turn a speculation into an investment is to remove the risk.

When you gamble in a casino you are speculating. The risk is high and against you. To make gambling an investment is about reducing the risk. If you could 'card count' which the casinos ban, you decrease your risk. But it is still speculative. If you had weighted dice on the craps table you could also reduce risk, but there would still be an element of speculation. If you fixed the roulette wheel so you knew where it would stop, you are no longer gambling - you are 'investing'. To have a high probability outcome that is known in advance is investing. The international banks are turning gambles into investments by the following process of guaranteeing an outcome. In less polite circles and street parlance it is referred to as 'rigging the game'.

"Chess players think 3-4 moves ahead. Chess Masters not only anticipate their opponent's moves but force them to make specific moves that guarantee a checkmate"

See Slide Presentation: Tipping Points: Commentary



David DeGraw reports at Amped Content:

In the aftermath of Goldman Sachs' public flogging before the world in Congress, and while under investigation, on the very day that Congress was voting on the "break up the too big to fail banks" amendment and cutting behind the scenes deals to gut the audit of the Federal Reserve, the stock market had its greatest sudden drop in history, plummeting 700 points in ten minutes - shades of September 29, 2008 all over again.

If you recall, back in September '08, as Congress was voting down the first bailout, the big banks made the market plunge a record 778 points in one day. Fear and panic then led Congress to pass the bailout. Trillions of our tax dollars, the money that we desperately need to keep our society functioning over the long run, then went out the window and into the pockets of the very people who caused the crash.

What happened on September 29, 2008 will go down in history as one of the greatest acts of terrorism ever.

9/29/08 proved that when you have so much power concentrated in the hands of a few, you can manipulate a computer algorithm and make the market and economy go whichever way you want it to go. So on 5/6/10, just as the power of the big banks was again threatened on the floor of the Senate and a deal on auditing the Federal Reserve was being negotiated, in came a sudden and unprecedented ten-minute 700 point market drop, a precision-guided High Frequency Trading (HFT) attack to show Congress who's boss.

If you think the massive sudden drop happened because one lowly trader hit one wrong button, if you actually believe that the entire stock market can plunge because of one mistaken key stroke by a low-level trader, you are stunningly naïve. I hate to burst your bubble, but this was a direct attack.

In a market where 70% of all trades are executed by computer algorithms via High Frequency Trading (HFT), Goldman Sachs has the power to make the market crash or rise at will. (2)

Tyler Durden reports at Zero Hedge:

"Goldman's dominance of the NYSE's Program Trading platform, where in addition to recent entrant GETCO, it has been to date an explicit monopolist of the so-called Supplementary Liquidity Provider program, a role which affords the company greater liquidity rebates for, well providing liquidity, and generating who knows what other possible front market-looking, flow-prop integration benefits. Yesterday [5/6/10], Goldman's SLP function was non-existent. One wonders - was the Goldman SLP team in fact liquidity taking, or to put it bluntly, among the main reasons for the market collapse....

... here is the most recently disclosed NYSE program trading data....

What is notable here is that of the 1.4 billion in principal shares, or shares traded for the firm's own account, Goldman was the top trader by a margin of over 100% compared to the second biggest program trader.

We have long claimed that Goldman is the de facto monopolist of the NYSE's program trading platform. As such, it is certainly the case that Goldman was instrumental in either a) precipitating yesterday's crash or b) not providing the critical liquidity which it is required to do, when the time came. There are no other options." (3)

Max Keiser who has written and authored Program Trading and HFT computer algorithms states:

"May 6th was an unequivocal act of domestic financial terrorism in America. A day that will live in infamy.

To scare the lawmakers, themselves large owners of the very banks and stocks that they are supposed to be regulating, a financial Weapon of Mass Destruction was put to their head and they acquiesced.

As the inventor of the continuous double-auction, market-making technology (VST tech. US pat. no. 5950176) that is referenced 132 times by program trading and HFT patents since 1996, I can tell you that Goldman, JP Morgan and the gang simply pulled the 'buys' from their computer trading programs and manufactured a crash. And when the coast was clear, and it was clear the politicians were not going to vote for anything that would break up the 'too big to fail' banks; all the 'sells' were pulled from the computers and the market roared back.

This is a Manchurian Candidate market where program trading bots start the ball rolling in whatever direction Wall St. wants the market to go - and then hundreds of thousands of day-traders watching Cramer on CNBC jump on the momentum bandwagon and commit the crime for the Wall St. financial terrorists, who then say, 'It wasn't us, it was 'the market!'" (4)

David DeGraw reports at Amped Content:

On Friday, the next day, after the "break up the too big to fail banks" amendment was soundly defeated by a 61 to 33 margin in Senate and a deal was struck to eliminate key provisions from the audit of the Federal Reserve bill, Goldman was meeting with the SEC to work out a settlement in their case against them. Once again, Goldman proves that crime pays. Welcome to the New Mafia World Order.

Other than the two major operations carried out on 9/29/08 and 5/6/10, we must also recall a smaller attack on January 21st and 22nd of 2010, when Obama had a press conference and came out in favor of the Volcker Rule, which would have limited these HFT and "proprietary trading" schemes. At that time, the market dropped 430 points. Soon after this attack, all follow-up talk on the Volcker Rule faded away and this reform has not been seriously addressed by Obama since then.

The bottom line: the United States has been taken over by a financial terrorism network. Let's face it, we are all hostages of these financial terrorists and their puppet politicians would rather be in on the scam than defend our interests. If these terrorists don't get their way at all times, they have the power to throw their tremendous weight around and turn millions of lives upside down in a matter of minutes and, as they have shown, they have no hesitation in executing that power, no matter how many millions of lives they destroy.

They set off this crisis with a wave of bombings in their initial Economic Shock and Awe campaign two years ago, resulting in massive devastation (2)



The "Speculators" made huge profits on the CDS run up, followed by horrendous profits on the plummeting Sovereign Debt Rates. If this isn't enough, they then profited on financing the whole bailout including getting the ECB to accept repos on questionable assets from the banks. (5) Alarming?

Portugal... Spain...Greece...these are all last week's news based on CDS trading patterns. Indeed, this week (Wednesday 05-05-10 ) saw the biggest trade unwinds of all top 1000 CDS entities (including all corporates) precisely in these three names. As the PIIGS implosion is finally being appreciated by everyone and their grandmother, the "speculators" are booking massive profits: the net cover/rerisking in Portugal and Spain was a massive $500 million net notional unwinds in each in the week ended April 30. Also known as taking profits. Greece and Ireland were also in the top 5, so as we have repeatedly claimed, the market will no longer make the news in Club Med. So where will it? No surprise there - the UK, France and Germany. The smartest money in the world is now actively betting the core of the eurozone is where the next CDS blow up will take place. With a stunning $630 million, $558 million and $370 million in net notional derisking, France, UK and Germany are the top three most active recipients in negative bets in the prior week, not just in sovereigns but in all names. The greatest non-sovereign derisker in the last week? Goldman Sachs, with $175 million. Nuff said. Yet a tangent on the UK: last week the UK saw $443 million in net notional derisking. This week the number is even higher: $558 million. There is now over $1 billion in net risky bets made that the UK may not last. And Zero Hedge's outside bet to be the first core country to blow up, thanks to its massive PIIGS exposure, France, finally made the top spot in net derisking, with $629 million in net notional, or 189 contracts. The smart money is now massively betting that Europe's core is done for; as the PIIGS have demonstrated, the blow out in spreads for the core trifecta can not be far behind. (6)



A less publicized but crucial part of the deal is the move by the European Central Bank to start buying not only government bonds of hard-pressed countries like Greece, but private assets as well. This move--a total reversal of longstanding policy--mirrors the action of the U.S. Federal Reserve. Since the crash of 2008, the Fed has purchased more than $1 trillion in mortgage-backed securities--aka: toxic assets--as part of its endless transfusion of cash to U.S. banks. Now the European Central Bank is doing the same to keep European banks afloat. (And not just European banks: U.S. banks are deeply tied to their European counterparts). (7)


If this hasn't alarmed you, add the fact there is strong evidence that the international banks have been short the Euro throughout this whole process and continue to be short. If recapitalizing the International banks was an objective, the European Crisis has answered those prayers.



After the $146B Greek Bailout was announced and prior to the nearly $1T EU bailout the NY Times reported:

"This is not a bailout of Greece," said Eric Fine, who manages Van Eck G-175 Strategies, a hedge fund specializing in currencies and emerging market debt. "This is a bailout of the euro system." Solutions are also not easily forthcoming. "In the end, we're all saying we don't know how to deal with it," said Dirk Hoffmann-Becking, a bank analyst with Alliance Bernstein in London. "We don't know how the channels work, or where the problems will pop up next." (8)



The above activities are as much a shift in modern Capitalism as a strategy of the global banks. When you make capital cheap and ubiquitous as we have over the last fifteen years, it changes investment strategy and behavior. It is more profitable today to speculate than make long term wealth generating investments such as factories and production which would create jobs. Long Term investments come with delayed profits and on-going risk. Speculation can be shifted to Investment by reducing the risk of the speculation. There are a number of ways of doing this. Risk is reduced by 'stacking the deck' or as in a carefully strategized chess game, by forcing your opponent to make specific moves that delivers the banks the game winning checkmate.

The only way to protect yourself from this money printing 'speculative' game is through the purchase of the only asset that is not someone else's liability - Physical Gold and Silver. It however should be seen as an insurance play versus an investment since it protects your wealth versus realistically increasing it. In today's Kondratieff winter, protection should be considered the goal.


To those who have had the foresight to realize that in the currency devaluation race to the bottom, the only winners will be non-dilutable precious metals (and not industrial gimmickry and bets on China's excess capacity like copper...well, maybe with the reverse alchemy exception of lead), we salute you. In fact, so does the market: the S&P is now down 8% year to date when expressed in ounces of gold. Because while central banks can monetize, sterilize (whatever that means), and dilutize that last remnant of the dying Keynesian religion, the FRN and its equivalents around the world, gold is untouchable, and increases in value with each desperate attempt to save a failed economic system. (9)


The Cover pages of all German newspapers - "there (10)


(1) 05-11-10 ECB risks its reputation and a German backlash over mass bond purchases Telegraph.co.uk
(2) 05-10-10 High Frequency Terrorism: How the Big Banks and Federal Reserve Maintained Their Death Grip Over the United States Amped Status
(3) 05-07-10 Where Was Goldman's Supplementary Liquidity Provider Team Yesterday? A Recap Of Goldman's Program Trading Monopoly Zero Hedge
(4) 05-10-10 maxkeiser.com
(5) 05-06-10 Numerous European Banks And Re/Insurers Identified With Tens Of Billions In Greek Failed Repo Exposure Zero Hedge
(6) 05-06-10 The CDS Traders' Verdict Is In - UK In Deep Shit... As Are France And Deutschland Zero Hedge
(7) 05-11-10 Rescuing Greece or the banks? Socialistworker.org
(8) 05-04-10 In and Out of Each Other's European Wallets NY Times
(9) 05-11-10 It Is Getting Ugly Quick In Fiat Land: S&P Now Down 8% YTD In Non-Dilutable Terms Zero Hedge
(10) 05-04-10 Greek Rescue Package Insufficient Will Need More Money Zero Hedge

For the complete research report go to: Tipping Points - Commentary

Sign Up for the next release in the Euro Experiment series: Euro Experiment
The previous Euro Experiment article: 8 Financial Fault Lines Appear In the Euro Experiment!


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