Market Manipulation And U.S. Economic Decline

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Volcker is viewed as a white knight of the Round Table, a modern Sir Galahad, but he is actually the black night of Arthurian legend- not to be confused with the black night of Monty Python and the Holy Grail.

[Column: Genesis Of The Financial Decline]

The United States has frequently accused the Chinese government of manipulating the value of the Yuan. 

Yet, in the past the Federal Reserve and the Treasury permitted the illegal manipulation of the dollar by the rigging of the Treasury Note market by Salomon Brothers- because it suited the goals of the Federal Reserve and Treasury. 

Paul Volcker, former Chairman of the Federal Reserve System, is currently Chairman of the Economic Recovery Advisory Board and a personal advisor to President Barack Obama.  Volcker is viewed as a white knight of the Round Table, a modern Sir Galahad, but he is actually the black night of Arthurian legend- not to be confused with the black night of Monty Python and the Holy Grail.

In two articles, “Wall Street Corruption:  Easy As A-B-C” and “They Messed Up Wall Street, Can We Entrust Them With Economy,” I showed that during Volcker’s tenure as Chairman of the Federal Reserve System from August 1979 to August 1987, he refused to investigate leaks of the movement of the Fed Funds rate, which earned companies billions of dollars. 

Volcker also turned a blind eye to the manipulation of the United States Treasury Note Market by Salomon Brothers. 

Volcker’s successor as Chairman of the Federal Reserve System, Alan Greenspan, whose disastrous economic mismanagement is responsible for much of the present economic crisis, also turned a blind eye to the manipulation of the United States Treasury Note Market by Salomon.

Salomon effectively lowered the cost to finance the debt of the American government.  But even perhaps more importantly because lower interest rates on the debt of the American government Treasury Notes would lower the value of the dollar against the Japanese Yen and the German Deutschmark.  In 1987 there was no Euro.  The largest European economy was that of West Germany and the Deutschmark was the most heavily traded European currency.  (Note:  I substitute Germany for West Germany)  This was a policy favored by both Volcker and Greenspan.

The question that the inquiring reader should ask is:  “How does Ed Manfredonia know that Volcker and Greenspan permitted the manipulation of the Treasury Note Market?”

Treasury Bills have a maturity date of less than one year.  Treasury Bill auctions are held every week.  Treasury Notes have a maturity date from two to 10 years and earn a fixed rate of interest paid every six months.  Treasury Notes are also sold at auction.  

Not every bank can purchase Treasury Bills and Treasury Notes.  Only 22 investment banks can bid for Treasury Bills and Treasury Notes.  These 22 investment banks then resell these Treasury Bills and Treasury Notes to the general public, other banks, pension funds, and other investment entities.

At the time of the manipulation of the Treasury Note market, E. Gerald Corrigan, was President of the New York Federal Reserve Bank- the same position, which was later held by Timothy Geithner prior to recently becoming Secretary of the Treasury.  It must be noted that being President of the New York Fed is really being a servant of the big investment banks, which are responsible for approving the President of the New York Fed.

Corrigan faithfully served Salomon Brothers and his good friend, John Gutfreund, Chairman of Salomon Brothers.  Geithner faithfully served Goldman Sachs and its former Chairman, Stephen Friedman, and also Geithner’s mentor, Robert Rubin, former Chairman of Goldman Sachs, former Treasury Secretary, and special advisor to the Chairman of Citibank. 

Freidman also served as Chairman of the New York Federal Reserve Bank and was responsible for Geithner’s appointment as President of the New York Federal Reserve Bank.  It was this appointment that led to Geithner’s accession as Secretary of the Treasury to succeed the immensely incompetent, Hank Paulson, a former Chairman of Goldman Sachs.

It was very easy for Salomon to manipulate the Treasury Note Market.  Corrigan, currently President of GS Bank USA, the parent company of Goldman Sachs, at that time President of the New York Federal Reserve Bank, was a good friend of John Gutfreund, Chairman of Salomon Brothers. 

Corrigan turned a blind eye to what was obvious manipulation of the Treasury Note market because this illegal manipulation of the Treasury Note market permitted the dollar to decline in value against the Japanese Yen and German Deutschmark- just what Volcker, Corrigan’s mentor, wanted.

Now why would Volcker want the dollar to decline against the Yen and Deutschmark?  In the late 1970s and early 1980s inflation was ruining the American economy.  To conquer inflation Volcker raised interest rates so high that the Fed Funds Rate reached 20%.  This high Fed Funds interest rate of 20% not only conquered inflation- but ruined the American economy. 

The 20% Fed Funds Rate increased the value of the dollar against the Yen and Deutschmark and thus made American manufactured goods, especially automobiles, too expensive for foreign buyers.  Let’s leave aside for the moment that American-made automobiles stank like dead fish on a hot beach.  Thus, there was a huge trade deficit- American imports exceeded American exports.  (Nothing has changed.  Only this time the United States blames China, instead of Japan and Germany.)

One way to reduce the trade deficit was to make the dollar cheaper.  In September 1985 Germany, Japan and the United States signed the Plaza Accord.  The Plaza Accord was an agreement whereby Germany and Japan would intervene in the currency market to weaken the dollar so that American manufactured goods, especially cars, would be purchased by individuals in Japan and Europe.  

This policy of course had one big flaw.  It assumed that individuals in Japan and Germany had less education, in reality were dumber, than Americans, when the converse was true.  Only the United States with a failing, and still failing educational system, would believe that Germans and Japanese were stupid enough to buy a car that did not function properly.

But Paul Volcker and his minion, Gerald Corrigan, knew that if the yields on Treasury Notes could be lowered, then the dollar would decline in value against the Yen and Deutschmark.

Salomon also knew this.  And Salomon Brothers knew that it could assist the decline of the dollar by manipulating the Treasury Note Market. 

Salomon was able to manipulate the Treasury Note Market because it was the biggest player in the Treasury Note Market.  Furthermore the government knew that primary dealers would talk to each other over the telephone concerning the Treasury auctions.  The Federal Reserve and Treasury also knew that Salomon Brothers was manipulating the Treasury Note market and decided not to rock the boat because it was benefitting the avowed aim of Volcker to lower the value of the dollar.

In reality it would have been very easy to catch Salomon Brothers.  All the Treasury had to do was to ask the firms for which Salomon had allegedly bid, if the firm had placed a bid via Salomon- and mention that there is a prison term for lying and a possible indictment of the firm.

The Treasury officially stated that it first knew of irregularities involving Salomon’s manipulation of the Treasury Note market in August 1990 when Paul Mozer, head of Salomon’s bond desk, placed bids for 35% of the Treasury Notes at auction for Salomon; 35% for the Quantum Fund; and, 35% for S. G. Warburg. 

It was discovered that Salomon had bid for 105% of the Treasury Note issue- not because of the genius of Volcker and Corrigan but because Warburg itself had placed a bid for Treasury Notes.  Mozer blamed a clerical error. 

The government caught Mozer by accident.

S.G. Warburg had placed a bid for Treasury Notes- and the government notified Warburg about the discrepancy, namely that Salomon had placed an order for Warburg.  Mozer apologized to Warburg and blamed a mathematical error.

Emboldened by the refusal of the Treasury to act- Mozer made a fatal bid.

In late 1990 the Treasury changed the rule so that a primary dealer could only bid for at most 35% of a Treasury auction for its own account. Salomon manipulated the Treasury Note by sampling placing bids exceeding the maximum percentage of 35% for which it could bid for its own account by placing bids in the names of other customers.

It was not until May 1991 that Salomon’s manipulation was discovered- by the government, although many on Wall Street knew of the manipulation.  In that auction for Treasury Notes Salomon purchased $10.6 billion of the $11.3 billion of the 2 year note auction. 

Other market participants, including Goldman Sachs, screamed that the Treasury Note was being manipulated, so the Department of Justice was obliged to investigate.
Salomon Brothers was fined $290 million and was eventually taken over by Travelers, which later merged with Citibank.  And of course Citibank received a government bailout.

The question:  “How did Manfredonia know that Salomon Brothers was manipulating the Treasury Note Market” receives a simple answer:

In late January or early February 1985 –I was a trader at the time— I was standing in the XMI pit at the American Stock Exchange when an announcement of the Treasury Auction made the tape.  I commented that the Treasuries had been sold at a lower interest rate than anticipated.  

Then one old-time member of the AMEX said:  “Eddie, my neighbor works on the bond desk at Salomon.  He told me that Salomon rigs the Treasury Market.”
I replied:  “You can go to prison for that.”

He replied:  “Eddie, no one on Wall Street goes to prison.”

When I questioned the duty of the Federal Reserve Bank of New York to monitor the Treasury market, my source replied:  “Eddie, New York has been instructed not to monitor the Treasury market too closely.”

Standing next to this Amex market maker was another Amex market maker, one who in 1977 had been indicted by the New York State Attorney General in a wide-ranging options scandal at the American Stock Exchange.  This indicted but not-tried and not-convicted felon told me that his friend worked at Salomon, but not at the bond desk, and his friend had stated that Salomon was manipulating the Treasury Note. 

Thus Corrigan and the New York Fed permitted the manipulation of the Treasury market.

I then had a friend speak to a member of the Amex Board with serious connections to Salomon about this.  The member of the Amex Board stated that he had been told that Salomon was manipulating the Treasury Market.  

The Amex trader was correct. 

Paul Mozer was sentenced to four months imprisonment in a minimum security federal prison- and he was able to keep the millions that he had illegally earned.  Would it not be wonderful to know why Mozer was sentenced to only four months in prison? 

Senior officers of Salomon Brothers knew of the manipulation of the Treasury Note market by Mozer.  Why?  Something called the net capital rule.  So much of Salomon’s capital was invested in Treasury Notes that it would have drawn a red flag.

But why would the government not be interested in prosecuting others at Salomon Brothers?  That may be explained by the example of the Oakford prosecutions.
In 1998 when Bill Killeen, the Chairman of Oakford, and a gaggle of New York Stock Exchange floor brokers, who had traded illegally for Oakford, were indicted, Killeen offered to provide Mary Jo White, then United States Attorney for the Southern District of the State of New York, with information regarding the illegal trading by Goldman Sachs’ NYSE floor brokers; illegal trading and net capital violations by Spear Leeds and Kellogg; and Dick Grasso’s, then Chairman of the New York Stock Exchange, involvement in covering up the illegal trading by Oakford.

Mary Jo White refused.  Mary Jo White is currently the partner in charge of litigation at Debevoise and Plimpton and earns in excess of $10 million per year from the same firms she was supposed to investigate and indict in her former incarnation as United States Attorney.

The Oakford lesson:  Do not go after the big boys.  Satisfy the oligarchs of the press with indictments of the small fish.  They are more interested in being greeted with praise at their country clubs and by their golf partners. 


 

 

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