*****FRAUD: Federal Reserve Is Selling Put Options On Treasury Bonds To Drive Down Yields*****



Links to material covered in video:

Search results for "sell put options on longer-term Treasury securities" (New York Fed' s website)

FOMC Transcripts and other historical materials
FOMC: Transcripts and Other Historical Materials, 2003
Transcript (826 KB PDF)  (FOMC Meeting on June 24-25, 2003)
Presentation materials (8.97 MB PDF) (material covered during meeting)


Ultimate Savings Account (Citibank website)

Citibank's "Sweet Deal" From Government (CBS News, November 24, 2008)

Credit Default Swaps: The Next Crisis? (Time, March 17, 2008)

Bond insurance (Wikipedia, the free encyclopedia)

Google results for "demand guarantee"

Credit Enhancement (Panasia website)

Lenders mortgage insurance (Wikipedia, the free encyclopedia)

Eight Ways To Bet Against Ben Bernanke (Forbes, November 1 2010)

Google results for portfolio insurance "put options'

Inexpensive Protection Against Rising Rates (Advisor Perspectives, June 22, 2010)

Daily Treasury Yield Curve Rates (US Department of the Treasury' s website)

Time To Leave Bonds (Advisor One, December 28, 2010)

Nassim Taleb Shorting Treasuries (Fund Manager News, February 7, 2011)

Google Archive News results for ceiling Treasury yields -"debt ceiling"

Bernanke Caps Treasury Yields to Cut Borrowing Rates (Bloomberg, March 19, 2009)

About the Fed > What We Do  (New York Fed' s website)

Commodity Regulators Ok Sales Of Futures Options (Anchorage Daily News, September 25, 1982)

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24 Responses to *****FRAUD: Federal Reserve Is Selling Put Options On Treasury Bonds To Drive Down Yields*****

  1. Radek S. says:

    Hi Eric,

    Thank you very much for this piece of information.

    I find this video as important as the video from CFTC hearing in March concerning precious metals manipulation.

    I always was suspicious of the issuers of those put options. The financial collapse will be triggered by initial collapse of some entity followed by insurance claims that will trigger the following collapses.

    This video will be perfected if you added at the end that most people buying insurance (put options) think they are safe when actually they are not protected against risk.

    The world is comming to an extremely rude awakening. In the following decades trust will be very hard to gain.

    Great video.

    best,
    Radek S.

  2. Robert says:

    Maybe we should all be selling put options.. free money until tshtf and then it's all worthless anyway right? Sell some treasury puts, buy gold.. of course if you or I did it we'd have to put up capital to cover the put instead of getting unencumbered cash to buy the gold. I imagine institutions such as citigroup would be able to do this though.

  3. Dave Narby says:

    Head's up:

    I tipped off ZeroHedge on this. Awesome work sir.

  4. ExExZonie says:

    These financial geniuses, such as "Helicopter Ben" always think they can figure out a way to beat the "system" (i.e., the laws of economics). Or they think they won't be the greater fool when the scheme is revealed. Or they think they can escape to an island before the game is up, with a suitcase full of "cash" or gold and sip mai-tais on the beach until they die.

    I don't understand what they are thinking... are they crazy, evil, deluded, incompetent, or all of the above?

  5. ExExZonie says:

    Here are a couple of articles about derivatives and how they crashed the market:

    Behind Insurer’s Crisis, Blind Eye to a Web of Risk
    http://www.nytimes.com/2008/09/28/business/28melt.html?_r=3&ref=business&oref=slogin&oref=slogin&oref=slogin

    Pull quote:

    The London Office

    The insurance giant’s London unit was known as A.I.G. Financial Products, or A.I.G.F.P. It was run with almost complete autonomy, and with an iron hand, by Joseph J. Cassano, according to current and former A.I.G. employees.

    A onetime executive with Drexel Burnham Lambert — the investment bank made famous in the 1980s by the junk bond king Michael R. Milken, who later pleaded guilty to six felony charges — Mr. Cassano helped start the London unit in 1987.

    A.I.G.'s House of Cards
    http://www.portfolio.com/news-markets/top-5/2008/09/28/AIGs-Derivatives-Run-Amok

    Note that Hank Greenberg was against CDS instruments but he was ousted from AIG by Eliot Spitzer when he was AG of the state of New York. After he was forced out,

  6. ExExZonie says:

    after he was forced out, Cassano went forward full throttle with the CDS instruments.

    Dear God, is that what the US is doing???

  7. SueDonim says:

    Definitely laid out the argument very well.

    But one disagreement and one question:
    - Eric speaks of puts as if they would only pay off in case of a default. That is not true. They are not CDS. The if and how much of a payoff depends on the strike price. I think it weakens the argument to equate the two. It still is, at a minimum, increasing the risk profile of the Fed, and I wonder if that risk exposure is disclosed. I doubt it.
    - The question is whether this is fraudulent. It is manipulative, but that (rightly or wrongly) is what the Fed does, manipulate interest rates. But is it fraudulent? Are they allowed to do this? Can a company sell puts on its stock or debt? I don't know the answer and could not figure out a good Google query on the question.

    • Eric deCarbonnel says:

      "Eric speaks of puts as if they would only pay off in case of a default. That is not true. They are not CDS." -SueDonim

      Actually, puts and CDS work pretty much exactly the same way. They both become more valuable as debt moves closer to default, and are both therefore a form of default insurance

      "There is a risk of having credit default swaps recharacterized as different types of financial instruments because they resemble put options and credit guarantees."
      from Wikipedia's entry on Credit default swaps

      • SueDonim says:

        I understand they are similar, and both go up in value as default approaches, and both act as default insurance in a sense. Absolutely. My point is though that at expiration a put has value so long as the underlying has passed the strike, but has not defaulted. But a CDS would pay only in the event of default.

        So the CDS is the more extreme case, though (thinking out loud here) the value of both would go up as default approached, and I assume would go up as interest rates increased in general. The difference being that I was thinking of value at expiration (or at event of default) where you were thinking of value before expiration. Fair enough. It still seems a bit overstated, but get your point.

        I haven't followed CDS movements well enough to know, but I would think they would go up somewhat in price with interest rates, but less so than a put. If however, the credit risk component of rates increased, the CDS price would increase faster than that of the put. My assumption only. I could be wrong.

        In any case, it definitely represents an increase (perhaps a substantial one) in the risk on the Fed balance sheet. All their movements strike me as becoming progressively more desperate, with risk increasing at a faster rate.

        It reminds me of the collapse of the Tacoma Narrows bridge (http://www.youtube.com/watch?v=xox9BVSu7Ok) , with the oscillation becoming more violent as it hit resonance frequency. I think that is what is happening at the Fed. Greater volatility leads to greater desperation, and ultimately - collapse.

        Back to your video though. I still don't understand if it is fraud from a legal point of view. It might be. I don't know.

  8. ExExZonie says:

    @SueDonim - I think the government (and the Fed) has the attitude: "we make the rules, so it's not fraud when we do it." (As the famous line in Frost/Nixon goes.) They do lie, and they are deceiving us with this tactic, to keep the game going a little while longer (trying to save the giant Ponzi scheme).

    I watched this video on a tip from Facebook, and was so riveted that I went back and watched all the videos. I learned a tremendous amount - Eric, your presentation style is excellent and you made a very complex subject reachable for those willing to listen and try to understand. I don't know everything I'd like to know (hey I'm just a technical writer) but the more I read the more depressed I get.

    Eric, I could hardly sleep last night because of this video, and because the people upstairs were shouting at each other for a couple of hours, but mostly because of this video. I woke up with many questions, but the most urgent one was this: where are these puts being sold? Are brokerages or agencies offering them as valid instruments? What is the price? How many are in circulation (alas, this may be the most important and most difficult factor to determine).

    I'm looking forward to your next blog post - kinda. In a way I wish I hadn't seen this.

  9. grateful fan says:

    Mr. deCarbonnel:

    The world owes you a debt of gratitude for the high quality work you are doing. Thanks!

  10. ExExZonie says:

    One more post and then I'll stop stalking you, Eric. Here's an interesting blog post on the Mean Old Investor blog:

    Credit Default Swaps

    He claims private CDS instruments alone are already in the hundreds of trillions, to wit: As a whole, US financial institutions have underwritten about $225 Trillion in CDS, guaranteeing everything under the sun.. including each other.

    The joke going around right now is, don't tell the government what comes after a trillion - maybe we're already there!

  11. honestann says:

    This is one of the best presentations that I've ever seen. Furthermore, the modus-operandi of the criminals banksters who run the federal reserve and large financial institutions is instantly recognizable. We have to assume this is what has been happening, and will be expanded to longer term treasury debt.

    Excellent, just excellent presentation. Thanks and congratulations.

  12. namesarefortombstones says:

    let's see if got this right: the Fed sells put options on US Treasury bonds. So the Fed is betting US Treasury bond prices won't fall to a certain level (the strike price). The put buyers pay the Fed a premium. If US Treasury bond prices don't fall to the strike price and the option expires, the Fed profits (Fed keeps the premiums). But if Treasury bond prices fall to the strike price and the options expire, the Fed has to pay the put buyers. Fed balance sheet takes a hit.

    Now, where is the fraud? i don't see the fraud.

    Call sellers, call buyers, put sellers, put buyers --- that's what the options market is all about.

    the Fed is simply a participant in the options market. Is the Fed NOT allowed to participate in the options market?

  13. jg says:

    Excellent video, Eric: clear, concise, compelling.

    Keep up the fine work, sir!

  14. Interesting . . . PIMCO is now short US T-bills. Purely coincidence, I'm sure.

  15. P.Ferreira says:

    You accuse the "federal governement" of committing fraud here. The fraud you describe here is undertaken by the Federal Reserve. This is not the federal government. As I am sure you understand, the Federal Reserve is a privately owned entity. Please correct your language.

  16. JoeB says:

    This exposes the lie of an exit strategy. How can the FED suddenly raise rates if it's selling puts betting on the opposite to happen?

  17. Ed says:

    Dear Eric,

    Thank you for this high quality piece of analysis.
    Another proof that there is a long way to go for fiat money to find an acceptable level of credibility. Gold at 20,000 perhaps?

    Ed

  18. There are so many hidden victims here its unmeasurable.

  19. Dan Alter says:

    You all seem to misunderstand the problem. The fed by selling puts on the bonds it sells takes a 30 year payoff and turns it into a margin call should the bonds fall below the strike price. Since the fed has spent the money received from bonds, then where will it get the cash. Only by selling more debt, decreasing price of debt thus increasing interest rates = catastrophic collapse

    Printing has the same effect.

    In short, really really stupid. It is not an if, it is only a question of when.

    • Eric deCarbonnel says:

      I don't misunderstand the problem. I was simply explaining it in a way the average joe might be able to understand. Getting into the technicalities of margin calls just unnecessarily complecates things.

      "In short, really really stupid. It is not an if, it is only a question of when." Agreed. It reeks of a last ditch desperate measure to delay the day of reckoning (dollar/financial collapse).

  20. Radek S. says:

    Dear Eric,

    You are going viral with this video in financial cycles. I saw already discussion/metion about it on runtogold.com by Trace Mayer, GATA, Miles Franklin, Max Keiser.

    It will take some time for this video to sink in the mindset of investors, but when it does it will have an explosive influence on the financial world.

    You will make yourself fameous with this video.

    best,
    Radek

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