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by Al Martin

The "Dark Market" Conspiracy: So-called Dark Markets Will Remain Dark, Opaque and Impenetrable

(4-26-10) The so-called Financial Regulation Reform bill is going to be passed, and it just depends on the tweaking that should occur over the next week or so, since both Republicans and Democrats are going to keep out what the investment banks considered to be some of the more onerous provisions regarding derivative regulation and the "illumination" of so-called "dark markets" -- which nobody wants. This bill dovetails into the reason why the Obama Regime has not changed the scheduled Bushonian tax cuts on unearned income and capital gains interest dividend income, which the Obama Regime inherited, so to speak. All the Democrats expected that these rates would increase because that's what Democrats do when they first come to power. But they havenít. And there is a reason behind all of these machinations.

      "Dark Markets" are so-called non-regulated, non-registered opaque markets that are maintained by brokerage dealers through the investment houses they are part of in order to effectively trade losses. In other words, they are trading financial instruments that have a negative net worth so they give them the appearance that they are actually worth something.

      The buyers and sellers of these instruments are effectively the investment houses themselves. Instruments with a negative value would have been packaged up and sold to Wealthy Republican investors who needed the "tax loss." You may remember these tax loss schemes that were popular in the 1980s, most of which were subsequently disallowed by the IRS. But you may have noticed that this disallowment did not occur until 1993 when the Clinton Regime came to power and by then most of the Pro-Bush Republican Faction money had left the country. In other words, there was no viable way for the IRS to recoup the money anyway.

      The continuation of Bushonian-scheduled tax cuts on unearned income and capital gains interest dividend -- what are the chief effects of it? It is to mitigate the value or render essentially useless the value of instruments that have embedded into them "tax losses." Why" Because nobody needs them.

      If you are bringing down capital gains tax rates to 2011, which will be the so-called "zero year" that is built into the Bushonian tax reduction schedule, temporarily drops to zero in 2011, then goes back to the old 28% level . Remember the old 28% tax level that occurred after 1986.This will begin in 2012.

      However the so-called dark market instruments which are essentially worthless CMOs and worthless CDOs (to say worthless is wrong; they're actually worth less than nothing) you had to create a market for these instruments because the traditional buyers have been taken out of the loop, i.e., Wealthy Republicans, when the Obama Regime decide to carry forward the Bushonian scheduled unearned income tax rates.

      What you do with these instruments since they are already carried on the books of virtually every bank and financial firm in the United States which own them either directly or indirectly as having a positive net value of anywhere between 40 and 90 cents on the dollar -- when in fact they are worth less than nothing. Therefore you have to create an artificial marketplace for them, so it can appear that they're still worth something.

      You create a marketplace that is not regulated by any of the state or federal regulatory bodies for instruments that are not registered anywhere. Since there's no requirement to register them, they're just packaged up and they exist because a brokerage firm is willing to make a market in them, although they are not registered securities and there's also no reporting requirement.

      That's one of the loopholes in the bill being formulated by Senate Banking Chairman Chris Dodd (D., Conn.). What Democrats wanted, particularly Barney Frank, was the "illumination" of these dark markets, in order to make them "transparent." He wanted to see these markets regulated by the SEC. That has all been scrapped now so these dark markets can continue to exist as an opaque market and effectively be hidden from the public.

      This will be the continued maintenance of a "dark market" for bundled securities which are principally mortgage paper that has become worthless because the houses in question that backed this paper have been bulldozed. The houses no longer exist -- but the mortgage paper that was written against them still does exist.

      That's what Joe Six Pack has a hard time getting his mind around -- although 3 million residential units in this country have been repossessed and destroyed and the titles no longer exist since they have been transferred to a government entity and there's no remaining equity or ownership left in the original mortgage, but the mortgage itself does exist within a package of previously bundled CMOs (Collateralized Mortgage Obligations) which actually got sold to somebody.

      How the bust of a speculative bubble worked was that it was revealed that CMO paper was worth only pennies on the dollar, as Working Class investors found out much later to their chagrin by reading their quarterly IRA or 401K statements -- since they were the principal holders of this paper). This was paper they bought through their investment and bond funds in 2006 at 100 cents on the dollar, which by 2008 was worth 20 cents on the dollar or less. Then they felt the effect of the decline of the value through the mutual funds they held which owned this paper -- these bundled securities.

      So what do you do with all this paper? You can't write it off because if you write it off, then the originators and bundlers of the paper which are the investment houses, etc. have to take a horrendous write-down. In other words, they're still carrying this paper on their books as being worth 60 cents on the dollar on average. However it is actually trading in the "real world" at 1 cent bid 3 cents offered. That means 3 cents on the dollar offered. Thatís what the paper is trading at in the "real world."

      In other words, to prevent the "real world" from expanding, you create a fictitious world and in that dark world you create a "dark market." It isnít regulated. The securities donít have to be registered, and there are no reporting requirements.

      And why do the "dark markets" remain untouched? Because Barney Frank's ability to try to illuminate the dark market was not supported by his fellow Democrats, particularly Christopher Dodd, because of senior Democratic senators' "closeness" to investment banks.

      Thatís why Obama had Dodd lead the so-called "reform" effort since Dodd is the most senior Democrat in the Senate who is the closest to the investment banks. That way they can say this was a Democratic initiative to re-regulate the industry.

      Therefore the bill will pass because Obama understands the realpolitik of the situation, and that is, if you start to illuminate "dark markets" and didnít allow them to exist, then the trillions of dollars of this worthless paper, these so-called securitized instruments, which are held by banks, insurance companies, etc. that would have to actually realize the losses. That has been the Great Shell Game of the collapse of the speculative bubble.

      How do you collapse a speculative bubble and ensure that only Working Class Republicans and Democrats, wearing their hats as Small Investors, take all the losses -- and so that no one else like the packagers, the credit rating agencies, the lenders, the dealers and everybody else involved in the chain that created these worthless instruments, donít take any losses?

      How you do that is by creating a fictitious marketplace wherein a bid and ask can be actually posted in a "dark market" for 60 cents bid and 80 cents offered on the dollar for a security thatís actually worth 1 cent to 3 cents. It doesn't make any difference because all the holders of the paper aren't selling it.

      If nobody ever sells the paper, then whatever investment houses are posting this 60 cent bid (which is actually 60 times what the paper is actually worth) if that bid is never hit, they wont have to deal with that paper. Then what difference does it make? Its only function is for book-keeping purposes.

      And then how do you make sure that all of the holders of this paper, which are not only investment houses, but also commercial banks and insurance firms, won't have to be sellers of this worthless paper?

      In other words, how do they keep their books liquid with worthless paper that no longer is getting serviced, that no longer produces any interest or dividend income from it since they're holding it at 60 times what it's actually worth? How do you prevent them from selling it so that they can keep their books liquid?

      You then proffer a second scheme with the Federal Reserve, so that TARP, TALP, and all the alphabet soup language programs come into play, wherein so-called institutional holders of this paper can use this paper and borrow money against it at nearly 100 cents on the dollar and then only have to pay .25% interest rates. Thatís how you keep it liquid.

      When you have paper that is worthless and no longer paying any interest or dividend, you must make sure that it appears to be worth something. And you accomplish that by using "dark markets." But you also have to keep it liquid because the people that hold these instruments can't hold them endlessly because they're not producing any revenue. So you keep these institutions liquid by endlessly lending them money at .25%, despite what the Fed says, which is that it won't take low quality assets as collateral. The Fed lied. They have taken in all of this worthless paper.

      So how can they get away with it -- taking in this worthless paper while claiming that they only take investment grade paper as collateral?

      They are still willing to accept the original credit rating on this paper, which was rated in 2005 and 2006. Thatís why Bernanke can go to the Hill and blatantly lie to Barney Frank and say -- we are true to our word and taking in only investment quality paper as collateral from the banks and insurance firms that are pledging it. So donít worry, the Fed says, we won't take anything thatís rated less than (single) A.

      Yes, he actually says that -- and "technically" he's correct. Even though the Fed knows that these ratings were bogus at the time, not because it was the fault of the credit rating agencies (who have unfairly been made scapegoats in this mess). After all they were providing ratings based on information given them by those who originated the securities.

      Nevertheless they're still being perceived as the "bad guy."

      So why was it that in part of this so-called Fed bailout and reliquification package, there was never any requirement to have the securities which were pledged to the Fed as collateral actually re-rated to reflect their true credit worthiness?

      There was never any demand or requirement for re-rating these instruments -- nor could there have been because then the Fed would have had to get a Congressional waiver to act outside of its charter, since the Fed can only accept what's called "investment grade" collateral.

      This entire situation then is a two-fold conspiracy. The first part of this conspiracy, which the Obama Regime invented with the help of Pro-Bush Faction Republicans who were largely culpable for what had happened, was to prevent a global economic collapse.

      The second part of this conspiracy is beginning to play out -- to ensure that a financial regulatory bill does not shine a light on "dark markets" and does not correct derivative leverage. This means that despite what Bernanke promised about going back to the old 12:1 leverage rule, that is not going to happen. All of that has now been written out of the bill and we find that Goldman Sachs is once again using 50:1 leverage to create derivatives from money it has borrowed from the American people by pledging securities that are not worth anything. Goldman Sachs, of course, is just one example of many.

      The question was -- how do you save the global economy? The same way it's been done before -- by transferring worthless assets to the American people wearing their hats as investors and then subsequently to them as taxpayers.

      It was also noted that the Fed would be selling the stock warrants it had taken on Citi Bank. They have been very popular and have had no problem selling them. The Fed can provide something that the marketplace doesn't. To an investor buying them, these warrants are a very long-term fixed call option. If you can buy them at 30-40 cents on the dollar for 30 years term, it becomes a speculative investment and it is the reason why the Fed had such an easy time selling these warrants.

      The other side of the warrant issue for small investors and what they donít understand is the enormous stock dilution that takes place. The warrants that the Fed has taken back as a part of the bailout packages are now unregistered securities. When the Fed sells these back to the public through this auction process, they put these warrants back into registration, since they can only sell it if itís a registered security. When a warrant becomes a registered security, there must be an accounting for the potential dilution in the future that exercise of these warrants would represent.

      The fiscal impact is this -- if you look at Citi Bank with more than 100 billion shares outstanding, what difference does it make if the warrants create another 20 billion shares down the line -- especially for a company that has a negative book to share value?

      The first part of the conspiracy to save the global economy has largely been played out in that the mechanisms to continue to prevent this collapse are in place and will continue for a while.

      The second part of this conspiracy visavis financial regulation and dark markets, etc. is to make it easy for the creation of a second speculative bubble in capital marketplaces -- most notably in equities and commodities. However we are beyond the point of creating a second speculative bubble in real estate.

      This all dovetails very neatly with the Bushonian so-called zero-year income tax in 2011 which the Obama Regime is going to keep. Markets are being bid up to a level way beyond supply/demand fundamental values. For instance, we see commodities being bid up -- despite the fact that the planet is swimming in commodities.

      The idea then is to create a speculative bubble, I would guess, over the next 12-18 months, which can then be collapsed a second time. This would create the last and final transfer of public wealth into the hands of, let's say, 3 million people. This will happen globally.

      This is the Last Gasp effort in wealth consolidation and thatís what is being built now.

      It will be a speculative bubble that can then be collapsed in a zero-tax environment.

      So the speculative bubble is being created and then Pro-Bush Faction Republicans (and those of us smart enough to understand) will get short that bubble. Then that bubble will be collapsed when capital gains tax falls to zero. Then everyone will be ensured that there are no claw-back provisions, so there is enough remaining liquidity in the Fed expansion of balance sheets. This will be the last and final hurrah of wealth consolidation.

      After 2011 and beginning in 2012, it's unlikely that there will be much concern about keeping it all together. In other words, you will see inertia begin to set in not only in the US but in the governments of all G-20 nation-states because there will be no reason to continue anything any longer.

      By "inertia," we mean both political and economic policy inertia. The only continuing plans and policy that would be made after January 2012, as Congressman Ron Paul points out, will be efforts to deal with the surplus of economically unproductive people that's being created.

      (The latest "solution" being floated is to start selling Soylent Green Brand energy/nutrition bars.)

      Then the only remaining policy initiative for the G-20 nation states (since we are beyond the pale and beyond the point of no return, economically speaking) and the last mandate of government is going to be to install mechanisms to reduce the number of economically "useless" people.

    * AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," ( provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" ( will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.


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