Eric Fry

“Achievements on the golf course are not what matters, decency and honesty are what matter.”
— Tiger Woods

“Honesty is for the most part less profitable than dishonesty.”
— Plato


Honest money requires honest stewardship. If, therefore, the dollar is to be an honest, trustworthy currency, the Chairman of the Federal Reserve and the Secretary of the Treasury must also be honest and trustworthy.

Anything less is a threat to the dollar’s value, which is a threat to the very foundation of the US economy.

Given this inescapable truth, what are we to make of the revelation that the Chairman of the Federal Reserve and the Secretary of the Treasury allowed the multi-trillion-dollar Libor fraud to operate for more than four years?

“LIBOR, which stands for London Interbank Offered Rate, may seem like a meaningless financial obscurity to most folks,” we explained in the July 19th edition of The Daily Reckoning, “But this particular obscurity happens to determine the pricing of trillions of dollars’ worth of credit lines and credit derivatives.

“Therefore, rigging Libor is a little like rigging magnetic north…or its modern-day equivalent, the Global Positioning System (GPS). Every compass in the world would point to a deception. More importantly, your Paris-bound jet might touch down in Tripoli. And even if your Paris-bound jet touched down in nearby Lyon, you’d still be a little annoyed…

“According to press reports,” we continued, “only three of the 16 banks that establish the Libor rate have admitted — or sort of admitted — to posting fraudulent LIBOR rates… But very few filthy kitchens contain just three cockroaches.”

Just a few days later, the world learned that the Federal Reserve and US Treasury were scuttling around with the roaches. Chairman Bernanke and Secretary Geithner knowingly allowed the Libor fraud to operate for four years! Incredibly, this outrageous revelation produced very little outrage. But the public non-reaction does not make the behavior of Bernanke and Geithner any less outrageous.

If the stewards of the world’s reserve currency are able to tolerate four years of cheating in the Libor market, what other frauds do they consider insignificant? Or worse, what other frauds might they be directly aiding and abetting?

This fraud was not victimless, Dear Reader, quite the contrary. Day after day, week after week, unwitting investors lost money they did not deserve to lose…as the Libor-riggers made money they did not deserve to make. The cumulative losses would be incalculable.

But that’s not all… The biggest victim of this crime may be the US economy, itself.

Dishonest financial markets paralyze capital. Generally speaking, investors refuse to invest in markets they perceive to be rigged or highly manipulated. And paralyzed markets tend to paralyze economic activity.

What’s more, the Libor scandal is not the first instance of large-scale, clandestine market-rigging that has occurred with the full knowledge — if not full cooperation — of the Federal Reserve and/or US Treasury. Remember all those secret, not-so-little loans the Fed doled out in 2009 to various financial firms? These were loans the Fed never disclosed at the time and never expected to disclose…ever. They were secret.

“Recent disclosures from the Federal Reserve reveal that honesty was one of the earliest casualties of the 2008 financial crisis,” we observed in the December 15, 2010 edition of The Daily Reckoning. “These disclosures contain a number of juicy tidbits, like the fact that Goldman Sachs received tens of billions of dollars in direct and indirect succor from the Fed…

“Thanks to the Fed’s massive, undisclosed assistance, Goldman Sachs managed to project an image of financial well-being, even while accessing tens of billions of dollars of direct assistance from the Federal Reserve…

“On June 17, 2009, thanks to some timely, undisclosed assistance from the Federal Reserve, Goldman repaid its $10 billion TARP loan. Just six days before this announcement, Goldman sold $11 billion of MBS to the Fed. In other words, Goldman ‘repaid’ the Treasury by secretly selling illiquid assets to the Fed…

“During the three months following Goldman’s re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman’s TARP re-payment.

Goldman Sachs Borrowing and MBS Sales to the Fed

“Did private investors not have the right to know that the Federal Reserve was secretly recapitalizing Goldman’s balance sheet during this period? Did they not deserve to know that the Fed’s MBS buying was producing Goldman’s ‘perfect’ trading record during this timeframe?

“Yes, would seem to be the obvious answer.”

But instead, private investors were forced to match their wits against massive, secret manipulation by the Federal Reserve. This secret manipulation would not become public until 18 months after the fact — long after unwitting investors had lost (or won) the capital the Fed’s dishonesty caused them to lose (or win).

Clearly, secret market-rigging is the Fed’s lifestyle, not an occasional lark. So the investment capital that is now huddled on the sidelines is unlikely to be thinking, “I’m sure glad the Libor scandal is over and done with. Now I can invest with confidence.” Instead, it is likely to be thinking, “Wow! What’s next? If the Fed allowed Libor-rigging, what other frauds is it allowing…or directly conducting?”

By his own admission, as early as 2008, Bernanke knew large banks were posting fraudulent LIBOR postings. Geithner has also admitted to knowing about it in 2008. But when the Congressional Financial Services Committee asked the Chairman last month why he never put a stop to the fraud, he replied, “[The Libor rate] is constructed by a private organization in the UK, and so our direct ability to influence that is limited.” Geithner provided a similarly feeble defense.


Both men possessed the power to halt a crime spree. Neither did. Instead, they simply winked and nodded at the criminals. Bernanke and Geithner have been doing so much nodding and winking during the last few years that they are starting to resemble narcoleptics with turrets syndrome.

“[Bernanke] is insulting his audience to say there was nothing he could do,” gripes Dean Baker, co-director of the Center for Economic and Policy Research, “That is complete nonsense. If he had called up [the head of the Bank of England, Mervyn] King and said that King has to fix the Libor [fraud], and if he doesn’t this all goes public, then King would have had no choice… Bernanke allowed this fraud to continue, violating his responsibilities as Fed chair.”

The United States deserves better.

The financial markets deserve better. The US dollar deserves better. And yet, the most scandalous aspect of the LIBOR scandal is that it has produced almost no scandal whatsoever. The Chairman is still the Chairman, doing the same stuff he’s been doing for the last six years, whatever that stuff might be. (Don’t worry, we’ll probably learn all about the stuff he’s been doing, eventually…maybe).

The Chairman of the Federal Reserve doesn’t have to be particularly brilliant, or stylish, or entertaining, but he ought to be particularly honest…or at least not particularly dishonest. That’s just no way to run a money-printing business.

“The Libor scandal is clarifying, if not shocking,” remarks James Grant, editor of Grant’s Interest Rate Observer, “On both sides of the Atlantic, investigations into the alleged manipulation are shifting from the bankers who supposedly did the fudging to the regulators who permitted it…”

Even in the best of circumstances, the Federal Reserve Chairman is a professional price-fixer and market-rigger. “The private sector manipulated prices opportunistically. The public sector rigs them on principal,” Grant quips, “In the United States, the Federal Open Market Committee fixes, or ‘sets,’ the funds rate… It manipulates the yield curve via Operation Twist. It manipulates the mortgage market, along with every other department of the credit markets, via so-called quantitative easing. It attempts to manipulate the stock market (and expectations concerning the stock market)…”

Although these manipulations are usually inimical to free market dynamics, they are, at least, disclosed publicly. Therefore, because they usually unfold in plain view, they do not usually repel or inhibit investment to any great degree. But when the world’s leading price-fixer starts conducting and/or ignoring secret market manipulations, that’s very bad news.

As one professional investor put it recently, “The Fed is manipulating so many markets at once that it has become tougher to identify a genuine free-market price in the financial markets than to identify a genuine female in a Bangkok bar… I don’t want to play in markets like this.”

And neither do many other investors or entrepreneurs. Increasingly, the folks with the capital to risk are refusing to risk it on anything. They are simply refusing to play the game…any game.

The 2012 Survey of Affluence and Wealth in America, from American Express Publishing and Harrison Group, finds that the wealthiest Americans are hoarding three times as much cash as they were two years ago. Their savings rate soared to 34 percent in the second quarter of 2012, up from 12 percent in 2007.

This skyrocketing savings rate is the flip side of lost confidence. A whopping 82 percent of the wealthy respondents said they would increase their spending and investing if they had more confidence in the future.

“[The wealthy are] basically stuffing money under the mattress,” says Jim Taylor, vice chairman of Harrison Group. “This has resulted in people managing their risk to a ‘no loss’ position rather than a ‘real gains’ position,” Taylor said. “That’s not the great tradition of American investing.”

Clearly, deception and dishonesty are no way to restore or inspire confidence in the financial markets…or to revive America’s legendary entrepreneurial dynamism.

The economy doesn’t need low rates; it needs honest rates. It needs to know that the free market is setting prices in the financial markets; not the Federal Reserve….or fraudulent banks with the blessing of the Federal Reserve.

Perhaps the Fed Chairman should add “honesty” to his short list of “policy tools.”

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

  • gman

    “Chairman Bernanke and Secretary Geithner knowingly allowed the Libor fraud to operate for four years! Incredibly, this outrageous revelation produced very little outrage.”

    why should it? is anyone really surprised? c’mon. who on hearing this would think “how could they!” instead of “oh … of course … I should have known.”?

    and as for outrage, how much is outrage, not that it was done, but at being left out of this profitable little scam? come on! these people spend their lives intoning “fiduciary duty” “weak hands” and “free market competition”. they just put it into practice at a higher level, that’s all.

  • gman

    “Clearly, deception and dishonesty are no way to restore or inspire confidence in the financial markets…or to revive America’s legendary entrepreneurial dynamism.”

    it sure isn’t. but it sure is a great way for a man to accumulate a huge pile of money. after all, isn’t that why everyone infests? to accumulate a huge pile of money? what’s the problem here?

  • Billybob

    I am so sick of these crooks and their crooked markets.

  • Woody in Florida

    I told everyone that would listen that the winning streak Goldman had in 2009 was a sham. I just didn’t know how they did it. You would think they would have mixed in a few more losses instead of only two, just to make themselves look less like cheaters. And yes gman, accumulating a huge pile of money is a popular reason for investing, but who wants to play when you know the dealer is cheating for someone, and you have no reason to think it is for you. The Fed always talks about manipulating expectations? Well I expect to get cheated, so I won’t play. I will just continue to accumulate gold and silver until their game is up.

  • gman

    “but who wants to play when you know the dealer is cheating for someone, and you have no reason to think it is for you.”

    oh, but you’re going to play whether you want to or not! it’s all about wealth extraction for those in control. if they can get you to bite the hook yourself they’ll fish. if you won’t bite the hook yourself they’ll spear you. if you swim away entirely they’ll throw dynamite in the water and blow you to the surface. one way or another they’re determined to get your wealth, and you’ll WISH for the good old days of kind gentle libor rigging!

  • gman
  • gman

    “If, therefore, the dollar is to be an honest, trustworthy currency, the Chairman of the Federal Reserve and the Secretary of the Treasury must also be honest and trustworthy.”

    but … if the chairman and the secretary were honest and trustworthy, would they permit a fiat debt currency like the dollar?

  • Earl

    Eric-That would be “Tourette’s syndrome, not turrets- Earl in FL

  • Starving Steve

    Let me play the devil’s advocate here and defend the Fed Reserve Bank rigging markets and shoveling dollars into the economy. ( I hope everyone has seen the cartoon on TV lately of the world’s central banks shovelling fiat money out into mountains— and with the world’s central banks rocking back-‘n-forth on their heaps of paper money. )

    But the theory of central banks acting to shore-up the economy and put factories and unemployed labour back to work, dates back to Mises.

    Hardly “junk economics”, Mises pointed-out that closed production lines, closed factories, and idle workers cause inflation— and not necessarily the fiat money that the central banks print (and shovel into their dead economies) to start-up production and generate work for everyone.

    After thinking about the world’s great inflation disasters: Mexico, Argentina, Brazil, Bolivia, Weimar Germany after WWI, etc, I don’t agree with Mises’argument, but I do think he has a valid argument in favour of central bank shovellings of the heaps of fiat money that they rock back-‘n-forth upon.

    The cartoon on TV of the shovellings and the heaps of fiat money that the world’s central banks rock back-‘n- forth upon is hilarious!

    But in an underscore of the validity of Mise’s argument, I just watched a team of road-builders get paid govn’t money to re-build San Juan Road between Hwy 101 and Watsonville, California.

    The public funds created jobs for the workers, and the public obtained a beautiful and smooth asphault road…. The end result of the employment was that Watsonville was moved closer to Salinas and closer to Gilroy, and both at least in terms of time-of-travel, difficulty-of-travel, and safety-of-travel.

    The result of this improvement in travel will lower the price of goods (such as fruits and vegetables) that are shipped out to the world on this road.

    So, the lower price of produce that this road improvement will make possible will give real value to the fiat-money the Federal Reserve Bank has shovelled into the economy.

  • gman

    “So, the lower price of produce that this road improvement will make possible will give real value to the fiat-money the Federal Reserve Bank has shovelled into the economy.”

    all true, except for one little point. the fiat money is not just fiat money. it is debt. they shovel out more, it means we owe more. further, no matter how much they shovel out and how much value it creates, we always OWE MORE THAN THEY SHOVEL OUT. they shovel out a million dollars, it means we owe two million. they shovel out two trillion dollars, it means we owe four trillion dollars.

  • Starving Steve

    “The United States of America will pay to the bearer on demand: xxxx dollars in energy, product or services generated by the nation. This note is an obligation of the United States Treasury, and it is redeemable at any Federal Reserve Bank.”

  • Starving Steve

    Hi gman: Being the slow-learner here and the official moron, might you explain to me why each shovel of fiat money causes two shovels of fiat money to be owed by the central bank? Especially when interest rates are now zero, one shovel of fiat money is one shovel of fiat money— in fact, one new shovel of fiat $ may be even less, because each shovel of new fiat generates new taxes to be paid to the govn’t, and these new taxes take $ out of the money-supply.

  • Fran Smith

    Yes, it’s Tourette’s syndrome. And could we stop making this difficult neurological condition the target of ridicule? These people have a hard enough time dealing with the ignorant in their everyday lives.

  • stephenjacobs

    “There is nothing more inflationary than idle workers, idle production-lines, and shuttered factories.”

    John Maynard Keynes (from the Great Depression)

    We might tack this quote onto the front door of the Republican Party, especially in the hard-money (silver dollar) states in the Western U.S. that have always adored the Republican Party.

    Another quote from John Maynard Keynes to tack onto the front door of your local Republican Party in America or the Tory Party in Canada and in the UK:

    “Capitalism is the astounding belief that the wickedest of men will do the most wicked of things for the greatest good of everyone.”

    And looking at our public schools: “The difficulty lies not so much in developing new ideas as in escaping from old ones.” (John Maynard Keynes)

    “Education: the inculcation of the incomprehensible into the heads of the indifferent by the incompetent.” (Again, John Maynard Keynes)

    I don’t like inflation in any form, but as a toddler in Duluth, Minnesota in the early 1950’s, I do recall my grandfather arguing with my uncle about the worth of paper money versus silver dollars….. And my uncle would take a five-dollar bill out of his wallet and show it to my grandfather. And here is what he would say in a John Maynard Keynesian moment: “What does this say on this currency?” And my grandfather would reply, “five dollars.” And my uncle would then continue: “Do you know why this is worth $5?…….. It’s worth $5 because the U.S. Govn’t says it’s worth $5; that’s why!” My uncle would continue, just to make the point clear to my grandfather and to all who were listening to this conversation in great interest: “Are there any questions?”

    Ofcourse, my uncle hadn’t experienced the waves of inflation that would follow America’s defeat in the War in Vietnam in the 1960s and 1970s. And he hadn’t experienced the Great Recession happening now. But post-WWII, the U.S. was the strongest nation in the world, and its currency was sound as silver dollars.

Recent Articles