Some crucial financial functions by the Treasury and Federal Reserve reportedly have been shrouded in secrecy by the U.S. government.
The prices of gold and silver have been allegedly suppressed by the Fed through JPMorgan Chase and HSBC, according to a London whistleblower.
Meanwhile, an analysis by a primary dealer in the U.S. Treasuries market shows that domestic banks could account for a large increase in direct bidders for government debt.
The reports come in the wake of economist Robert Reich's claim that the secretiveness of the Federal Reserve means it has no place in a democracy.
"The Fed is not part of the legislative branch," Reich recently wrote in his blog. "Its secret deals … violate the democratic process, if not the Constitution itself."
JPMorgan Chase and HSBC, which do the Federal Reserve's bidding in the precious-metals markets, reportedly have long been the government's lead actors in keeping down the prices of gold and silver.
Andrew Maguire explained to the New York Post JPMorgan's role in the metals pits in both London and here, and how they can generate a profit either way the market moves.
"JPMorgan acts as an agent for the Federal Reserve; they act to halt the rise of gold and silver against the U.S. dollar. JPMorgan is insulated from potential losses [on their short positions] by the Fed and/or the US taxpayer," Maguire, a 40-year veteran of the metal pits, told the Post.
"HSBC conducts an ongoing manipulative concentrated naked short position in gold. Silver is much easier to manipulate due to its much smaller [market] size," said Maguire, a former Goldman Sachs trader working at the London Bullion Market Association.
Maguire was scheduled to testify last week before the Commodities Futures Trade Commission, which is looking into the activities of large banks in the metals market, but was knocked off the list at the last moment.
However, "No one at JPMorgan is familiar with Andrew Maguire," said Brian Marchiony, a company spokesman. HSBC declined to comment.
Meanwhile, domestic banks could account for a large increase in direct bidders for government debt, Reuters reported.
The presence of direct bidders, one of three main categories of participants at Treasury auctions, has increased during recent auctions of securities.
Primary dealers, the banks and investment firms authorized to deal directly with the government and help the Federal Reserve carry out monetary policy, have fretted over the unpredictability of the direct bid, as well as the paucity of information on the identity of the bidders.
A report from Nomura Securities analyzing the Treasury Department's investor allotments and auction data theorizes that domestic banks account for part of the increase in direct bidders.
"With banks still reluctant to lend and the saving rate on the rise, bank assets have been shifting from loans to securities, benefiting from the steep curve," wrote George Goncalves, a fixed income strategist at Nomura.
Treasury data show banks increased their purchases of longer-dated Treasuries just as the percentage of direct bidders began to increase.
The department, which is aware of the identities of bidders but doesn't disseminate the information, welcomes the added participation in auctions as the government continues to issue new debt at a breakneck pace.
"At the March 10-year (note) auction, banks purchased $2.6 billion 10s (the highest on record)," Goncalves wrote. "Meanwhile banks purchased over $3 billion in (30-year bonds) in March too. This is noteworthy as in the past banks rarely went beyond the five-year point in this sort of size."
Nomura's analysis follows a hypothesis by Barclays Capital earlier this year that an increase in the direct bid was driven mainly by domestic money managers and mutual funds attempting to keep their purchases secret from the rest of Wall Street
For his part, Reich says that “Thomas Jefferson put a stop to Alexander Hamilton’s idea of a powerful central bank out of fear it would be unaccountable to the public. The Fed has just proven Jefferson’s point.”
As long as it's merely setting interest rates, Fed secrecy and political independence can be justified, says Reich, who served in three national administrations and was a secretary of labor under President Bill Clinton.
But once it departs from that role and begins putting billions of dollars of taxpayer money at risk — choosing winners and losers in the capitalist system — its legitimacy is questionable, says Reich, now a professor of public policy at the University of California at Berkeley.
The Fed now admits it bailed out Bear Stearns — taking on tens of billions of dollars of the bank's bad loans — in order to smooth Bear Stearns' takeover by JPMorgan Chase, Reich notes.
“The secret Fed bailout came months before Congress authorized the government to spend up to $700 billion of taxpayer dollars bailing out the banks, even months before Lehman Brothers collapsed,” he points out.
“The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned bailout.”
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