Crowne Gold

Le Metropole Members,

Suspicion of manipulation falls on Treasury repo market

Submitted by cpowell on 08:05PM ET Tuesday, November 28, 2006. Section: Daily Dispatches

The Bond Market's Dirty Secret
A Whiff of Scandal Threatens
Treasury Repurchase Market

By Katie Benner
Fortune magazine

via CNNMoney.com
Tuesday, November 28, 2006

http://money.cnn.com/magazines/fortune/fortune_archive
/2006/12/11/8395437/ index.htm?postversion=2006112809

Like greenbacks in a mattress, government bonds enjoy a reputation as a fail-safe investment. The integrity of the $4 trillion-plus U.S. Treasury market is essential, because it keeps investors, particularly big foreign players, pumping cash into the debt-laden federal coffers.

Treasury yields are the benchmarks for corporate debt, mortgages and car loans, so any disruption in the market could have a wide-ranging economic effect.

Just such a disruption occurred on Nov. 3, when several newspapers reported that Philip Smith and Robert Fischetti were in negotiations with UBS to leave the bank's trading desk amid rumors that the Securities and Exchange Commission was scrutinizing the bank for manipulating the Treasury repurchase, or "repo," market.

The SEC declined to comment. UBS would not verify whether the pair were still at the bank, but it did say it is cooperating with a government investigation.

UBS is one of the 22 investment banks that buy bonds directly from the Federal Reserve and resell them to customers, including mutual funds, pension funds, foreign investors and others. The members of this club, which include Lehman Brothers, Cantor Fitzgerald, and Mizhuo Securities, also use the bonds as collateral for loans.

One of the privileges that come with being a primary dealer is an in-depth knowledge of who is scouring the market for a particular bond -- and therein lies temptation.

Sometimes a dealer with big brokerage and lending operations (let's call it Bank A) will learn that a rival (Bank B) is going to need a certain issue by a certain date. Bank A can quietly try to snap up a big portion of that issue. Then, when Bank B goes into the market trying to find those bonds, it will encounter a dearth of sellers and will be inclined to pay a premium for them.

Taking big positions isn't in itself illegal, but using inside info to manipulate the market is.

On Nov. 6, the 22 primary dealers were summoned to the Federal Reserve Bank of New York by the Interagency Working Group on Market Surveillance to discuss market manipulation. The Working Group includes officials from the Fed, the New York Fed, the SEC, the Commodities Futures Trading Commission and the Treasury. A week later the New York Fed announced that no bank would be allowed to hold more than 35 percent of any single issue.

...Old news, new concerns

The Treasury market has been tarred by scandals before, most notably in 1991, when Salomon Inc. rigged five Treasury auctions. Those scams ended in the ouster of then-CEO John Gutfreund, a $290 million settlement payment, and a famous rescue of the firm by Warren Buffett.

And insiders say that moneymaking shenanigans have long been a feature of the repo market. Matthew Smith, a portfolio manager at Smith Affiliated Capital, likens that world to the Wild West; some traders compare it to a casino where participants sometimes play high-risk poker with government debt.

If this has been the case, why are regulators getting worked up about it now? In a speech at the Bond Market Association's meeting in May, the Treasury's undersecretary for domestic finance, Randal Quarles, said that the department had noticed an uptick in questionable trading since 2004. "I would urge any traders that establish especially large positions in any Treasury issues to tread very lightly," he warned.

At the end of September the deputy assistant secretary for federal finance, James Clouse, reiterated the warning when he spoke to the Bond Market Association. During that speech, Clouse also noted that bad behavior in the repo market becomes more profitable (and thus more tempting) when short-term interest rates rise, as they have been doing lately. The Fed has raised its benchmark short-term rate to 5.25 percent from 1.0 percent in just two years.

And keeping the Treasury market clean is more important than ever. As Clouse said in his speech, "If the integrity of the secondary market were to be compromised, many investors could well migrate away from Treasuries" -- meaning that a blowup in the repo market could scare overseas investors away from U.S. debt in general.

It's a nightmare scenario, given the fact that foreigners lend the U.S. most of the money the government uses to fund its annual deficits. Foreign banks, led by Japan and China, have been on a debt-buying spree since 2001. They now hold 55 percent of all Treasury debt, up from 35 percent in 2001.

In exchange for the loans, they get the safest place in the world to put their money -- or so they believe. If misdeeds discredit the market and lead foreigners to put their money elsewhere, it might take significantly higher interest rates to entice them back.

* * *

Join GATA
at the
2007 Vancouver Resource Investment Conference
Vancouver Convention and Exhibition Centre
Sunday and Monday, January 21 and 22, 2007

http://www.cambridgeconferences.com/ch_jan2007.html

Admission is free for those who register in advance. The conference has arranged discount rates at the Pan Pacific Hotel adjacent to the convention center.

* * *

Help Keep GATA Going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at www.GATA.org. GATA is grateful for financial contributions, which are federally tax-deductible in the United States.

Contact GATA

info@gata.org

Gold Anti-Trust Action Committee
7 Villa Louisa Road
Manchester, Connecticut
06043-7541 USA

www.gata.org

Recommended Sites

Recommended Internet sites for daily monitoring of gold and precious metals news and analysis.

Free sites:

http://www.jsmineset.com

http://www.cbs.marketwatch.com

http://www.mineweb.com/

http://www.gold-eagle.com/

http://www.kitco.com/

http://www.usagold.com/

http://www.usagold.com/amk/usagoldmarketupdate.html

http://www.GoldSeek.com/

http://www.GoldReview.com/

http://www.capitalupdates.com/

http://www.DailyReckoning.com

http://www.goldenbar.com/

http://www.silver-investor.com

http://www.thebulliondesk.com/

http://www.sharelynx.com/

http://www.mininglife.com/

http://www.financialsense.com

http://www.goldensextant.com

http://www.goldismoney.info/index.html

http://www.howestreet.com

http://www.depression2.tv

http://www.moneyfiles.org/

http://www.howestreet.com

http://www.minersmanual.com/minernews.html

http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html

http://www.goldcolony.com

http://www.miningstocks.com

http://www.mineralstox.com

http://www.freemarketnews.com

http://www.321gold.com

http://www.SilverSeek.com

http://www.investmentrarities.com

http://www.kereport.com

(Korelin Business Report -- audio)

http://www.plata.com.mx/plata/home.htm

(In Spanish)

http://www.plata.com.mx/plata/plata/english.htm

(In English)

http://www.resourceinvestor.com

http://www.miningmx.com

http://www.prudentbear.com

http://www.dollarcollapse.com

http://www.kitcocasey.com

http://000999.forumactif.com/

http://www.golddrivers.com/

http://www.goldpennystocks.com/

http://www.oroyfinanzas.com/

Subscription sites:

http://www.lemetropolecafe.com/

http://www.goldinsider.com/

http://www.hsletter.com

http://www.interventionalanalysis.com

http://www.investmentindicators.com/

Eagle Ranch discussion site:

http://os2eagle.net/checksum.htm

Ted Butler silver commentary archive:

http://www.investmentrarities.com/

Recommended Gold & Bullion Dealers

Coin and precious metals dealers who have supported GATA
and been recommended by our members:

Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112
888-413-4653
http://www.blanchardonline.com

Centennial Precious Metals
Box 460009
Denver, Colorado 80246-0009
1-800-869-5115
http://www.USAGOLD.com
Michael Kosares, Proprietor
cpm@usagold.com

Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
http://www.ColoradoGold.com
Don Stott, Proprietor
1-888-786-8822
Gold@gwe.net

El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
http://www.eldoradogold.net
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203
harvey@eldoradogold.net

Gold & Silver Investments Ltd.
Mespil House
37 Adelaide Rd
Dublin 2
Ireland
+353 1 2315260/6
Fax: +353 1 2315202
http://www.goldinvestments.org
info@gold.ie

Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
http://www.gloomdoom.com
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
gwestgaard@investmentrarities.com

Kitco
178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
and
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Canada
Toll-free:1-800-363-7053
Fax: 514-875-6484
http://www.kitco.com

Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
http://www.certifiedcoins.com
Ed Lee, Proprietor
1-800-835-6000
leecoins@aol.com

Lone Star Silver Exchange
Suite 635, 3521 Oak Lawn Ave.
Dallas, Texas 75219
214-632-8869
http://www.discountsilverclub.com

MRCS Canada
12303-118 Ave. NW
Edmonton, Alberta T5L 2K2
Canada
http://www.mrcscanada.com
Michael Riedel, Proprietor
1-877-TRY-MRCS
1-877-879-6727
mrcscanada@shaw.ca

Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
http://www.milesfranklin.com
Contacts: David Schectman,
Andy Schectman, and Bob Sichel

Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614
info@mocoin.com
314-965-9797
1-800-280-9797
http://www.mocoin.com

Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877
Metalguys@aol.com
http://www.buysilvernow.com

Richard Nachbar Rare Coins
5820 Main St., Suite 601
Williamsville, N.Y. 14221-8232
877-622-4227
http://www.CoinExpert.com
nachbar@coinexpert.com

Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
http://www.swissamerica.com
Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
FiGoldstein@swissamerica.com

The Moneychanger
Box 178
Westpoint, Tennessee 38486
http://www.the-moneychanger.com
Franklin Sanders
1-888-218-9226, 931-766-6066