Adrian Douglas: Don’t ease up yet on MorganChase, CFTC

By Adrian Douglas
Saturday, August 22, 2009

I have a couple of issues with Ted Butler’s comments in his interview this week with Eric King of King World News (http://www.gata.org/node/7705).

First, I greatly admire Butler’s analytical work in silver, which is well-researched and meticulous. I disagree with his opinions expressed in that interview.

1) Butler speculates that J.P. MorganChase has hedged its silver short position on the Comex via instruments like over-the-counter derivatives and so now may not care if the silver price goes up.

The issue with precious metals short positions is the ability of the shorts to deliver real metal. Any hedging with derivatives will not necessarily result in silver being delivered to MorganChase; such hedging might deliver only dollars.

I agree that MorganChase could hold call-type derivatives that in theory would provide the firm with a neutral dollar-denominated risk on its Comex silver shorts if the silver price rises. This of course would assume that the counterparties are capitalized enough to pay up if silver rose in price significantly. The OTC derivatives market is totally unregulated with no clearinghouse, so the ability of such counterparties to pay is questionable.

But if we are going to postulate that MorganChase has dollar hedging of its silver shorts, I don’t think we have to invoke the questionable OTC derivatives market. For MorganChase has the ultimate dollar hedging because the firm is essentially the Federal Reserve and the Fed has a “technology called the printing press,” as Fed Chairman Ben Bernanke famously bragged.

We know that MorganChase and the Fed are essentially the same entity because MorganChase was selected by the Fed to take over Bear Stearns for $2 per share with no due diligence and apparently no competitive tender between rival banks. When Bear Stearns shareholders protested the $2 per share offer, it was arbitrarily increased to $10 per share. What normal enterprise could suddenly increase a takeover bid by 400 percent without batting an eye in times of great financial stress?

But if you have a money-printing press, who cares what you pay for Bear Stearns?

If MorganChase has access to unlimited dollars, then the firm can roll its Comex futures indefinitely and never have to deliver and never have to cover. But this does not imply that the firm does not care about the silver price rising. The firm’s whole raison d’etre as the big short in Comex silver is to cap the price. I think MorganChase does care if the price of silver rises because the Fed doesn’t want that.

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