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March 20, 2008 – Comments (0)

But what about those drooling investment bankers? They will claim that this
harvested money used in takeovers will eventually produce U.S. jobs, despite
initial job losses due to the takeovers themselves. Investment bankers, who
engineer many if not most takeovers, nearly always argue that the takeovers
ultimately create jobs in the long term. The investment banks themselves,
however, nearly always insist on being paid substantially in the short term
through the transaction fees. Their employees, the investment bankers, are also
substantially paid short term through annual salaries and bonuses. They get paid
now; others can wait for the long term.

Panic Buying

One short-term thing the money has already done is to pump the dollar. The
mechanism by which this is accomplished is quite simple and is signature Plunge
Protection. It is the device of the short covering rally. This is what happens
when speculators sell an asset—stocks, Treasuries or dollars—short. With stocks,
this means that they sell the asset without actually owning it. They borrow the
shares they sell, betting the stock will fall. They then buy it at the reduced
price and return those shares. Another way to accomplish essentially the same
thing is through options. The risk in a short sale is that the stock will not go
down but instead go up. The short seller literally is exposed to unlimited
losses in this case. This is the basis for a short covering rally. Non-shorters
buy in sufficient volume to force up the price. The price rise scares the
shorters into buying right away before the price goes too high and they lose too
much. This results in panic buying as large numbers of short sellers feel
compelled to buy to limit their losses. Often when the stock market suddenly
blasts up out of a long slide for little or no reason, we are watching a short
covering rally. There have been several such rallies in the currency and
Treasuries markets so far this year, and there will probably be quite a few
more.

According to a J.P. Morgan survey, the year 2005 began with most U.S. and
international speculators holding short positions on U.S. bond markets.[18]
Obviously this is because they had foolishly looked at the underlying economic
reality, and failed to understand the profound import of the American Jobs
Creation Act. Most people were utterly unaware of it until at least January 13,
when the U.S. Treasury, under whose direction the Plunge Protection team works,
announced the specifics of what the grand skim could and could not be spent on.
As noted, the list included stock market pumpers—takeovers.

The $100 billion (minimum) that will be brought in is not petty cash. One
currency strategist at ABN Amro, Greg Anderson, has been quoted as saying, “The
U.S. trade deficit is probably $600 billion in 2005, so this flow will be
financing a sixth of the deficit all by itself.”[19] Thus this amount is clearly
enough to have some impact on currency markets, especially if used to trigger
short covering rallies.

Whatever is the actual amount that is brought in, it is exceedingly unlikely to
be all brought in at about the same time. The companies have full discretion as
to when to bring it in, and Plunge Protection is there to make sure they don’t
do it at the wrong time. Various of the “ad hoc conference calls” referred to
above by Secretary Snow could include fund managers and Chief Financial Officers
of companies with chunks of cash lined up to bring in. Would this incestuous
network of essentially insider traders be legal? It would be very difficult to
prosecute without impeaching the President himself. As cited above, Section 2b
of Executive Order 12631 states: “The Working Group shall consult, as
appropriate, … with major market participants to determine private sector
solutions wherever possible. (emphasis added)” Obviously a major currency plunge
is exactly what Plunge Protection is charged with avoiding.

The major market participants involved in these money pumping rackets would not
only be making money, but would view each other as true patriots. They would
simultaneously serve themselves and serve the national interest. And, if the
story ever got out, they would be unlikely to serve any time. They would also
get the reputation for being currency-timing geniuses. Each time they brought in
cash from euros or pounds, the foreign currency subsequently fell. Their timing
would appear impeccable. Never mind that they and some government officials are
creating the timing.

How big are these chunks of cash? Johnson & Johnson announced in February that
they would bring in $11 billion.[20] Pfizer put its planned figure at $37.6
billion.[21] But are these figures big enough to pump the dollar? You bet. An
ABN Amro currency strategist, Aziz McMahon, has been quoted as saying, “The sums
are so large that if even a small proportion is transferred from other
currencies, the positive impact on the dollar could be substantial.” According
to that bank’s calculations, each $20 billion pumped in from other currencies
pumps the dollar against a broad index of currencies about 1%.[22] So the
announced amounts would be sufficient to trigger both momentum trading in the
dollar and trigger short covering rallies which themselves would trigger further
momentum trading.

Even the announcements of the currency repatriations can trigger short covering
rallies. ABN’s McMahon added, “The psychological impact a wave of announcements
could have on structural short-dollar positions should also not be
underestimated.”[23]

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