Market Manipulation

The following is an addition to the In Session thread made today (available to all enrolled members).

I want to comment on the notion of market manipulation, which I have hinted at recently.  What does this mean, "manipulation?"  For me, the definition is "moving markets in a given direction for overt political or financial gain for a relative few in opposition to basic fundamentals."

There's lots of evidence, both direct and indirect, to support the notion that our "markets" are not really markets at all, but rather subject to non-economic forces producing something other than "orderly price discovery."

Here's a prime example from yesterday:

S&P flip-flop sows confusion in CMBS market

By Aline van Duyn in New York

Published: July 23 2009 00:23 | Last updated: July 23 2009 00:23

Confidence in the dysfunctional market for securities backed by commercial mortgages has been further dented after a rating flip-flop by Standard & Poor’s caused confusion.

The rating agency, which recently changed its criteria for large numbers of bonds backed by loans for shopping malls, office towers and other commercial property, upgraded bonds to triple A just days after those same bonds had been sharply downgraded.

My comments:  Hmmmmmm, that's kind of strange, don't you think?  AAA bonds had been downgraded not just 'sharply' as the article says, but all the way to BBB-, which is right down there at the very edge of deep junkdom.  From triple-A to triple-B and back again.  In a few days.  What could the reason for this be?   Whatever the reason, we can certainly strike "economic" from our list of considerations.  Let's see if the article provides any further clues.

The reversal on the rating of some commercial mortgage-backed securities (CMBS) came late on Tuesday, the same day that the US administration proposed legislation that would force a raft of new disclosure rules and restrictions on agencies such as S&P, Moody’s Investors Service and Fitch.

My comments:  Okay, that's one potential reason - new restrictive legislation is being considered and S&P suddenly decides to make drastic changes to one of its recent ratings.  So we might surmise that there was somebody in power that was unhappy at the downgrade and applied some pressure via the threat of new disclosure rules, with the message being, "Either you change your rating, or we're going to occupy some of your offices and look over your shoulder forever and ever."  However, I consider this angle to be unlikely.  It simply takes too long to get proposed rule changes in place, and this seems to be a mere happenstance. We can safely ignore this reason.

Let's keep reading.

The decision not to downgrade some of the CMBS after all was made after S&P realised that bonds with a shorter lifespan were less risky than other bonds in similar structures with longer lifespans. Assessing risks of securities backed by loans stems largely from analysing which bonds get repaid first from interest payments and loan repayments.

Alan Todd, head of CMBS research at JPMorgan, said the mistake appeared to be a basic misunderstanding of the way cash flows are distributed across a mortgage-backed security and it was an error that should not have been made.

My comments:  Here it is suggested that there was a legitimate economic reason for ping-ponging between AAA and BBB-, but even though they dutifully trotted out a JPMorgan flack to provide some cover for this 'explanation,' let's be honest:  There's no way this is the reason.  The difference in cash flows and risk across AAA and BBB- is simply too large for this to be a legitimate explanation.  If S&P had maybe bounced the rating back up to BB or even B I would have grudgingly said "Okay, maybe...." but all the way back up to AAA?   No, sorry, nope.

Let's keep reading...the real reason is buried near the bottom of the article (as they often are).

The Federal Reserve is seeking to reignite the market for CMBS, in part by financing purchases of the securities, as long as they are rated triple A.

Ding! Ding! Ding!  We have a winner!!  It turns out that the market for CMBS is still in a deep funk, and the Federal Reserve wants to step in here with its thin-air money program and start buying them up.  But they are restricted to buying AAA securities.  Which means that the ones that S&P downgraded could no longer be purchased by the Fed under the rules of the game as they currently stand.

Clearly the Fed wanted to buy the particular issues involved, and of the two things that could be done, forcing S&P to change its rating was deemed to be easier than changing the rules at the Fed.  So S&P took another hit to its already shredded credibility (which had to gall them terribly) and made a major and embarrassing revision to a recent downgrade.

This upgrade had nothing to do with fundamentals and everything to do with the Fed's desire to buy these particular issues at full price.  If bought at BBB-, these CMBS  products would have been bought at perhaps 60 cents on the dollar, but then the bank that was holding them would have had to record a steep loss.  Instead, buying these as a AAA issue allows the full mistake of the big bank involved to be completely covered up by the Fed.

This is nothing less than a deliberate program of monetizing bad debt by printing money out of thin air to exchange for bad debts on the books of one or more large, well-connected banks.  Small investors, your 401K, and taxpayers need not apply.

This raises a number of troubling issues and conclusions:

  1. Ratings are not worth anything, because where they were subject to market forces making them too high during the formation of the credit bubble, they are now too high due to political pressure and manipulation on the way down.  Ratings are worthless.
  2. Political pressure is being overtly used to effect specific market outcomes.  Where else is it being used?  Does any of this explain the recent stock market behavior and GS's outlandishly good 'trading returns'?  If so, then we are in trouble, because false prices lead to bad investments and therefore serve to enable, not cure, the particular pathology that afflicts us.
  3. There are still enough bad debts on the books of large banks to require this sort of skullduggery.  The notion of a rebounding economy and green shoots are entirely inconsistent with this sort of desperate maneuvering.  It is this sort of manipulation that leads me to be especially skeptical of the notion that the economy is on the mend.  If it were, then this bizarre action would not have been required.

There are a number of other troubling issues for me here, but I think that's a sufficient list for now.  Because I can see such manipulation here in the CMBS market, I assume that manipulation is happening elsewhere, where there is perhaps less transparency.  I make this assumption because in every financial crisis there are two components:  the actual financial damage and the associated loss of confidence.

Of the two, the crisis in confidence is the part most addressable by politicians using their power to effect specific market behaviors.  During the Great Depression, FDR used government power to directly target higher agricultural prices by openly destroying crops and livestock.  The idea was that once people regained their confidence, they were supposed to begin buying and selling with their former vigor.

Under the very best of circumstances, the confidence-building efforts of the politicians will also provide outlandish returns to well-connected financial elite, who will therefore not put up any opposition to the actions. 

Here we have large banks getting full price compensation from the Fed for a pile of ruined debt, in an action designed to "restore confidence" to the CMBS markets so that market participants will resume buying and selling with their former vigor.  That's a win-win-win as far as everyone is concerned.  

Well, everyone except the taxpayers, of course.

This is a companion discussion topic for the original entry at

Hello Chris:
Sper read. Thanks! Take care

Thanks Chris,
I have to ask this to you and readers.  Are we convinced yet that the State is beyond reform?  I.e. We cannot vote our way out of this?

Government is a disease that masquerades as its own cure.

My Takeaways:

  1. The ratings agencies are puppets, and have no independence

  2. The Fed Balance Sheet is currently the worst of any entity in the history of the world, based on the crap they have been and continue to be buying since March 2008

  3. If Ron Paul’s legislation were to pass, and a true independent auditor with no ties to the US were allowed in to audit the Fed balance sheet, the ensuing report would destroy any remaining US financial credibility in the world, collapse the US$, and put US T-bills into junk status

  4. This being said, politicians will allow the cloak and daggers to continue out of necessity

What a great question!

I have been seeking a cause to get behind to initiate real change for several months now. I have not found a way to impact said change as of yet. I hope that someone can point us to something that can work with the time we have left!

There is an answer.  Click the link in my signature.

You gotta love a thinking man.
It will take me some time to digest all that, something I will need to save for this evening.

On the surface, it seems like it is a wonderful desired state. What is not clear to me yet is how to get there. I’ll be back… and thanks for the post.



Human kind in its frailty, will not be able to sustain that concept. Why? Humankind possess vast ability for kindness, love and respect. The same being, harbors with equal ability to be cruel, corrupt, and selfish.

In a perfect world, everyone would contribute to his or her ability, they would care for those who couldn’t and be able to settle differences with little duress.

However, as we have seen here on this "community" there are striking differences of opinion that leads to discord. Could Argorism evolve and survive in the shadows? Of course. Barter of services and goods continues even today in many circles. The issue becomes when any "middle" exchange (gold silver) is used to trade things not otherwise easily exchanged. i.e. heart transplant for a haircut.

The concept appears to be very Jeffersonian.


End of sideline comment… you may return now to your regular education on how we are being fleeced on a daily basis.


Thanks Chris!
You are truly (and thankfully) our "faithful information scout"!


 Maybe this comment would be better left over at the agorism thread, but has anyone checked out the Open Source Ecology effort ( and their land-based demonstration site, the Factor e Farm, ( )? BTW, is on their weblog ( ) blogroll, so some of them must be familiar with Chris and his work. I just think that the folks at the Factor e Farm are developing an impressive set of practical tools and technologies that can be implemented at a small-community scale. The goal is to allow a small group of people to become completely self-sufficient given a reasonable amount of land ( ~30acres), so this offers at least one avenue of realizing a society of freely trading communities free from extensive interference from the state, I think. 

Great link, funky.
I just graduated this spring with a BS in bioengineering, which I’m afraid will not be a viable field in a world of reducing complexity. That said, I am more concerned now with finding/building a transition community than I am with finding a job and becoming a wage slave. I’ve moved back in with my parents and I’m spending most of my time re-thinking my future and working to develop transition skills. The Open Source Ecology effort looks like a great resource for this!

Chris great article as always.
My one comment and observation to date is this:

As repugnant as this practice is to us here on this site the overwhelming majority of people in the US and other leading countries expect the government and central banks to do something even if that something ultimately makes the situation worse.  To do nothing and let the market self correct would be political suicide.  the irony as I see it (anecdotal observations), is that the very people who expect and demand government action are those most hurt by it.


Until the general publics understanding of economics improves (Austrian vs Keynes) the current financial system will continue with its present course to an ultimate collapse when all fiat currencies go up in flames.


Pity as it does not have to end this way.




Yes is the time to work in a community oriented live, independent of the goverment that will collapse in the coming years.
The idea is well depicted in the movie zeitgeist addendum, just is missing the work needed to make the human a real contibutor to the community, the work of each human over the egoism, that work is very well document in the and sites.



I always check in with this site for the reality that the MSM will not dare report.

The things I read here are often disheartening…

But I’d rather know.

Thanks for it all!

I always check in with this site for the reality that the MSM will not dare report.

The things I read here are often disheartening…

But I’d rather know.

I think we are all red pill poppers...Perhaps CNBC and MSNBC are for the blue pill poppers.

The manipulation is much worse than you think:
Not only will "the next twenty years be much different than the last," they will be be worse than the 50 years prior to the last 20 in direct proportion to the extent the last 20 were brought to a frothy boil above said 50; i.e., don’t just expect a regression to the 1950 to 1980 mean, expect a standard of living that is equally below that period as was the recent period of bubblemania above it. To put it in simple terms:

1980-2007 standard of living: 10

1950-1980 standard of living: 6

2010-inifinity? standard of living: 2

 That depends upon how you measure standard of living.

 If I understand correctly, it’s in the Fed’s best interests to take on all the bad stuff they can from their member banks.  This way it’s backstopped and ultimately paid for with interest from the US Govt / American taxpayers.  So the more they can take up the bad money from members, the healthier/wealthier the members are, with interest added since the money is borrowed from us.  They are loving it, I’m sure.

Another thought - we pay for it once + interest by directly borrowing for homes, etc. and then we will pay for it a second time + interest by paying back the government debt.  So, in effect, the banks make the money twice + interest twice.

I consider what is happening in the stock markets at the moment to be insanity, if not manipulation (which I believe it to be also).
The UK today published its latest GDP figures - the economy has slumped 5.6% since the second quarter of 2008, the Office for National Statistics (ONS) said, the biggest fall since its records began in 1955.

In the US, Microsoft and Amazon published figures below estimates - estimates, which, as far as I can gather, have been low by analysts because of the current conditions. So, thus far, 74% of S&P have beaten these low analysts’ estimates and 60% have had earnings drops, in other words these low estimates have been beaten because of cost cutting (and layoffs presumably).

Result, over the last two weeks the markets have rallied over 11%. TODAY, the FTSE finished UP! And, as I write, it looks as though the Dow and S & P will also finish up! Bloomberg TV a bit earlier described the US moves as being partly due to company report revenues being less worse, while also describing the ‘disappointing’ Microsoft/Amazon results.

This is absolute madness.