Treasury Nominee Failed to Halt Bond Scam

[Joanne98]

By Lucy Komisar
Inter Press Service (IPS), Jan 19, 2009

U.S. senators at Timothy Geithner’s confirmation hearing for Treasury Secretary Wednesday may want to ask him about a failure to act that is costing the U.S. a lot more than the amount he evaded on taxes.

The Federal Reserve Bank of New York, which he has led since 2003, conducts the operations on Wall Street of the Federal Reserve Bank in Washington, the country’s central bank. The New York Fed under Geithner’s presidency has failed to stop massive naked short selling of U.S. Treasury bonds that threatens the stability of the market and sale of the bonds.

Ironically, the scam, enabled by a lack of regulation at the behest of Wall Street brokerage houses, makes it more expensive for the U.S. to bail out those same financial institutions.

It happens this way: an individual or fund is allowed to sell bonds without owning them. This is called short selling. The seller, whose broker has generally “borrowed” bonds from another broker, is supposed to subsequently buy them on the market, and return them to the lender. The seller does this because he believes that the bond is going down, and he will buy them at a cheaper price than he sold them for.

Naked short selling occurs when a seller does not borrow the bonds for delivery at settlement, and therefore never has to buy them. This is called a failure to deliver, or FTD.

Meanwhile, the buyer thinks he or she has the bonds but has just an IOU. The result is a distortion of the market. Sellers sell bonds they never own or borrow, so there are more securities sold than issued by the government. These phantom bonds don’t represent money paid to the U.S. Treasury or genuine securities for buyers.

The major broker-dealers who handle bond trades like the system. They profit from fails by using clients’ money for other purposes.

The economist who has done the key work on this issue is Dr. Susanne Trimbath, who heads STP Advisory Services in Omaha. She previously worked for the Depository Trust Co, a subsidiary of Depository Trust and Clearing Corp, the U.S. clearing house for stocks and bonds.

Dr. Trimbath said, “In fall of 2008, about two trillion dollars in Treasury bonds were sold but undelivered for six weeks, more than 20 percent of the daily trading volume, up from 8.6 percent in the first five months of 2008.” It was a spike from 1.2 percent in the first five months of 2007.

“There was excess demand for the Treasuries,” she said. “Rather than allow this to push the price up, the Federal Reserve Bank of New York and the DTCC allowed failures to deliver to depress the price.” This affects the value of bonds held by individuals, funds and major investors such as China.

The latest figures on failures to deliver are 600-800 billion dollars. Dr. Trimbath said, “The numbers look better now because the Fed threw two trillion at the market, which was used to cover these fails.”

She said that Geithner failed to heed the warnings of economists at the New York Fed who in 2002 and again in 2005 analysed failures to deliver of Treasuries and recommended fines for the brokers responsible. A New York Fed white paper in April 2006 called for stricter enforcement of delivery and penalties for violations. The Bond Market Association opposed reforms, and again Geithner failed to act.

Even the current financial crisis has provoked only a faint reaction from the New York Fed. On Jan. 5, it acknowledged that, “Since November, short-term interest rates have declined to unprecedented levels.” It proposes a regulation to allow the buyer and seller to agree that if the buyer doesn’t receive the securities by five days after sale, the buyer could submit a claim against the seller for payment. But this can be done now and could have been done in 2002.

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http://thekomisarscoop.com/2009/01/19/finance-us-treasury-nominee-failed-to-halt-bond-scam

Ever noticed how it's only the WOMEN who uncover these scams? What's wrong with the men anyway?