The Mother of All Banking Conspiracies

During bear markets conspiracy theories run rampant. (Why? Human Nature: success in a bull is my cleverness; failure in a bear is someone else's fault.) Here is a doozy: that the current market drop is caused by Goldman Sachs. I suppose it should be considered a companion piece to Karl Denninger's argument that Bernanke intentionally crashed the market in Sep2008 to spook Congress into passing TARP, but at least that one has a clear factual basis; intent is the open issue. This one is pure speculation.

The article picks up on Murray Rothbard's view that the monetary history of the early 1900s is largely a fight between the Morgans and the Rockefellers. (Rothbard is a well-know Austrian who wrote a good assessment of the Great Depression, and his banking fight argument has some basis in fact.) When JP Morgan merged with Rockefeller's bank, Chase, it supposedly signaled the two former foes had aligned for some reason. The article argues it was to fend off the growing power of Goldman Sachs, and especially "Goldman Sachs South", formerly know as the US Treasury Dept. Goldman had gone too far by front-running the market and getting away with naked shorts. 

The recent ascendency of Volcker, who came up through Chase Bank, and his proposal to end the proprietary trading desks of places like Goldman, is to curtail these excesses. The particular proposal was a bit of a puzzle, since it seems a bit small time when compared with Volcker's prior calls for a reinstatement of Glass-Steagel, and his editorial in the Sunday NYT. This article suggests it is targeted at Goldman and can be seen as a shot across the bow. 

So far nothing particularly alarming as conspiracies go, but the article drops this bombshell: that Goldman is deliberately driving the market down in a game of chicken to get Obama to back off real banking reform. That slide started when Obama announced the Volcker Plan. Obama's reiteration of banking reform in his SOTU speech shows he is fighting back. The sharp drop since SOTU is the purported reply from Goldman. 

If this theory is substantive, the market should drop hard next week, even crash. 

If you love this stuff, I suggest you follow the links and come to your own conclusion. I discount conspiracy theories. Oswald killed Kennedy. Fluoridation is not a commie plot. Aliens do not abduct people. Area 51 does not contain spacecraft. And I don't buy this one, even if the market crashes. 

Comments

[Canadian Money]

I see Bob is getting some good press coverage on his recent call of a rally top.

http://www.vancouversun.com/business/fp/Bearish+analyst+predicts+another+stock+letdown/2500034/story.html

[Taz]

The less than spectacular decline in the banks suggests the market is dropping for some other reason than a US bank-centric reason.

[rzero]

The Denninger theory is bunk. The chart he references did not include all the new Fed programs that were rolled out, as I was checking this referenced page at the time of the crash. You can go check the historical balance sheet on the Fed's site, and see that all the liquidity that was drained from some facilities was added to other facilities, and then some. No net liquidity drain at the time. Also the Fed funds rate would have spiked up if his theory was true, which it didn't.

[trendlines]

Good one Yelnick, we're on the same page here. Human beings generally tend to underestimate the forces of the universe. Generally optimists by nature, conspiracy theories ripen during mass states of denial caused by unexpected negative events.

[cloudslicer]

What is interesting is the price action of the BKX and KBE during the the last few weeks. Its very bullish. Normally one would have expected a big decline from the banking sector. But this is not the case, the sector appears to be behaving like a defensive sector.

So score one for the bulls.

[t]

Please Yelnick...you're above this kind of crap.

[Glenn Loser Neely]

I have another conspirancy theory:

Glenn Neely is a good market forecaster beacause he speaks to his toilet!!

GLN

[Bill C]

Thanks rzero, I was hoping there was a good explanation for that.

I went over to HuffPo to take in the crazy, most of my brain cells survived. The woman who wrote the article said that GS was trying to tank the market to send a message. How? Do they have a massive short position? That wasn't discussed. The proximate cause was the use of high frequency trading algorithms to manipulate the market. I guess they could be used to only make offers but eventually they would end up with a huge short position.

A better question is why let GS continue as a bank holding company if they are using customer or Fed funds for leveraged market positions? Like all conspiracy it requires enough opaqueness around the subject so that the general public can jump to the conclusion the author wants.