A solid six years ago, I published an article and got all sorts of flak for it.
One side was calling me a crackpot.
The other said I was kidding myself and didn’t do anywhere near enough research.
One person said I must be an idiot who lived in my mom’s basement. Thanks, buddy.
And, of all the things, it was about big bank manipulation. You know that thing that was totally true.
It seems like ages ago that the LIBOR scandal evolved into, well, an everything scandal.
If you could name something banks could rig, it was happening. And, as was pretty obvious, silver was on that list.
So I wrote an article with the title “Why Is Silver Manipulation So Absurd?“
If you don’t feel like reading old news, the idea is pretty simple. Here is the meat of it:
JPMorgan inherited a massive amount of silver shorts priced between $20 and $21 when it took over Bear Stearns. Combined with HSBC, the two mega banks covered 85% of all silver shorts.
That right there is a solid case for manipulation — because the short position was so massive compared to physical silver trading and long positions. What’s worse, the U.S. Treasury created the situation.
If the free market resolved the situation, silver would have more than doubled as the short position was covered and evaporated.
The massive position was maintained for years because it wasn’t easy to wind down. Any large-scale attempts to unwind the position would be countered by other big traders and result in a loss. JPMorgan didn’t have to, though; it simply needed to rig the system to turn a buck.
A precious metal trader named Andrew Maguire sent detailed information in an email to the CFTC on Feb. 3, 2010, about what to expect in two days after he noticed signals from JPMorgan and HSBC traders using after-hours high-frequency trades to crush prices.
His description was perfectly accurate. The trader, selling four hundred contracts per second, dumped 45,000 contracts into the market. Each was for 5,000 troy ounces for a grand total of 7,000 tonnes. The seller then suddenly shifted and started purchasing everything he could. Still moving far faster than other traders, he or she walked with $3.6 billion.
In more recent history, JPMorgan has been holding about 25% of the silver short market with the largest eight commercial silver shorts account for 50% to 60%. Estimates put paper silver positions at 143 times the actual amount of physical silver traded.
Massive volumes of sell orders are placed and canceled in fractions of a second by them. The lower sell prices still appear in market data for anyone that cannot handle trading by the millisecond, leading to panic selling by other (much slower) traders.
The high-frequency trading system then snaps up the positions for profit. After all, they never sold anything to begin with… they simply maintained short positions and canceled sales to buy at discounts.
The government eventually threw a couple tepid charges at a couple traders. Most were dismissed, JPMorgan ate one of the charges just to avoid the higher cost of legal fees, it seemed.
And that was that, that is, until very recently.
Now, federal prosecutors are charging the head of JPMorgan’s global precious metals trading desk along with two others with RICO offenses — the exact same ones used to tear down the old mafia families before tearing them apart.
Assistant Attorney General Brian Benczkowski laid it out like this, “Based on the fact that it was conduct that was widespread on the desk, it was engaged in thousands of episodes over an eight-year period — that it is precisely the kind of conduct that the RICO statute is meant to punish.”
Specifically included in the charges was discussion of spoofing orders on a massive and ongoing scale and lying to CFTC officials and CME Group investigators.
Thank you, sir. It’s about time.
The thing is, it probably doesn’t matter all that much. Sad but true.
JPMorgan will put up a much more serious defense this time around to counter the much more serious charges. It can outspend prosecutors 10 to 1, or 100 to 1, or 1,000, or 10,000. The sky is the limit.
Like most other prosecutions involving manipulation, if any charges stick after a jury is bored to death over weeks or months of court dates, they’ll be watered down and fail to get even close to the core of the problem.
And when the dust settles, everyone else who dodged a bullet this time will go back to business as usual. Assuming they haven’t already.
It feels good to see these crooks called out, and quite loudly, in public though. I’m not saying that just for me. I’m not a snowflake when it comes to some flak for what I write.
More for all of us, and not in that internet-age schadenfreude way.
Shame is something missing these days. Even if these traders don’t feel it, at least it is finally being heaped on them.
